November 7, 2024 · 11 mins read
Santosh Kumar
A good diet will keep your body and mind healthy. Similarly, a good CIBIL score will keep you financially healthy. Yes, we work hard and earn money to improve our lifestyle, achieve our financial goals and make our passionate dreams come true. But there are times when we get stuck in financial emergencies or fall short of cash to meet our needs. In such conditions, no doubt, we turn to credits to navigate the situation without financial distress.
But you need to have a good CIBIL credit score to avail of credit products, right? Let's explore the top 10 habits to maintain a good CIBIL score and to keep yourself creditworthy at all times to avail of credit products.
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The Credit Information Bureau (India) Limited, which is now TransUnion, provides a 3-digit score to evaluate your creditworthiness. The score ranges from 300 to 900 and is calculated by considering various factors like payment history, credit utilisation ratio, credit length, credit mix and recent credit inquiries. Payment history and credit exposure have the highest contribution, each of 30%, in the CIBIL score formula. While credit type and duration contribute to around 25% of your CIBIL score, various other factors have a 20% contribution in the CIBIL score calculation.
Lenders cannot personally verify the creditworthiness of the borrowers when they reach out to them for loans or credit cards. Hence, they check the borrower's credit score to make the lending decision. The CIBIL score, the credit score by one of the major credit bureaus in India, is more prevalently used by banks, financial institutions and lenders to verify the borrower's financial responsibility.
A good score signifies that you are financially responsible and more likely to pay the bills on time. Hence, lenders will be ready to approve your loan or credit card application quickly and without much effort. On the other hand, if your score is low, lenders may find it difficult to trust your creditworthiness and may reject your credit application. Even if the credit application is approved, the amount may be less or the interest rate would be high.
Not only lenders but also some employees check the CIBIL credit score of the candidates before selecting for financially responsible jobs that include cash-handling tasks. Hence, it is important to always have a healthy CIBIL credit score.
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1. Excellent CIBIL Score: 750-900.
2. Good CIBIL Score: 650-750
3. Average CIBIL Score: 550-650
4. Poor CIBIL Score: 300-500
With a good CIBIL score, lenders will offer you loans as fast as possible and at lower interest rates. But with an excellent CIBIL score, you can even negotiate for better interest rates or more amount.
Maintaining a healthy score is not rocket science. It is just easy. You should know the good practices. Consistently following them and making them a habit will help you stay within the excellent CIBIL score limit.
Without any doubt, your repayment behaviour can make or break your credit score. Lenders need to believe that you can and will repay the credit bills promptly. If you have missed past payments, how can the lenders believe you? Delayed payments are also red flags that you are least bothered about paying back your credit bills. The more you delay the payment, the worse your credit score gets. Missed payments, delayed payments and partial payments are the major damaging factors of credit score. So never miss, delay or partially make a payment. For unavoidable reasons, if you missed a payment, don't wait to pay the bill the next month. Try to pay as early as possible.
Automate the payments as much as possible and set reminders to ensure that you have made the payments.
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Do you know that using your credit cards to the maximum limit will bring down your credit score? Yes. Even though you are using the credits within limits, frequently using the credit products to the maximum limit is a sign that you overly depend on credits for your financial needs. Experts suggest maintaining a 30% credit utilisation ratio, a ratio of the credit amount you use to the maximum limit available. You can use the credits a little more or less than this limit and once in a while, you can use the credit products to their maximum limit. But don't make it a habit to use more than 50% of credit cards, possibly not more than 30%. If your credit utilisation is frequently exceeding 30%, you can opt to upgrade the credit card to a higher credit limit. But, before upgrading, think wisely about whether your income and budget are sufficient to pay that increased credit bill every month.
Credit mix is one factor that will improve the CIBIL score over time. The different types of credit, like car loans, vehicle loans, credit cards and EMIs in your credit history, are proof that you can manage different credits wisely. So dare to opt for credits instead of paying cash, if you are financially disciplined to pay back the bills promptly. But ensure that you do not apply for multiple credit products simultaneously, as it will spoil your score. Also, credit mix has only the least significance in the credit score. So, never take loans just to improve your score. But don't hesitate to avail a loan whenever there is a bulk purchase or an expense.
When you apply for any credit product, the lender will check your CIBIL score to analyse your repayment possibility. The credit score check done by lenders or financial institutions will be considered a hard inquiry, and multiple recent hard inquiries are red flags that you are in some financial crisis. So, avoid applying for multiple credit products at the same time. Also, check your CIBIL score before applying for credit products and, if possible, shrink back from your decision if your score is too low to minimise unwanted hard inquiries.
Old is gold in the credit score formula, especially if the account has a good payment history. Yes, older accounts specify that you are experienced in wisely handling credits. With an older credit history, the credit bureaus will have sufficient data to evaluate your credit score. So, try not to close older accounts. Alternatively, you can choose to downgrade your credit limit to keep your account active.
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Co-signing for loans or credit products for your close acquaintances when they are in financial trouble is an act of kindness. No doubt. But be cautious about for whom you are co-signing. Do a little research and understand whether the person you are co-signing has sufficient income to repay the bills and is the person responsible enough to pay bills on time. Otherwise, your CIBIL score will be in trouble if they default on any payment.
CIBIL score keeps changing based on your credit activities and it takes time to build the CIBIL score. So keep an eye on your credit score periodically and always stay within the safer limits. If your score is in the lower limit or has started to decrease, take steps immediately to push it to safer limits. Don't wait for a situation when you need credit products to build the score. Even when you are not in need of new credit products, it is a clever choice to have a score of more than 650 so that you will always be ready to avail of credit products.
It is well-known that your financial mistakes will bring down your CIBIL score. But do you know that the mistakes in your personal details will also bring down your score? Yes, the wrong address, phone number or other details will make your report suspicious and will degrade your credit score. So often, check your credit report to ensure all your personal details are correct.
Another mistake in the credit report that badly affects your score is the wrong information or missed updates in the payment details. Periodically check your credit report to ensure all your payments are updated with the right amount and date. Wrong information should be reported to the appropriate authorities as soon as possible.
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You might have heard this a lot of times and these words perfectly suit a good CIBIL score. Most of the above steps need proper prior planning and consistently sticking to that plan. Plan the budget and set aside amounts for credit bill payments a month ahead. Plan your credit products and credit limits to stay within the 30% credit utilisation ratio. Plan your expenses to avoid simultaneous multiple credit applications. Plan a schedule to frequently check your credit score and credit report and set reminders to execute it.
Yes, you heard it right. Staying away from credit will never build your credit score. Your credit score would be NA if you are a newbie and have never used any credit products. Lenders may find it difficult to make a lending decision and hence may decide to reject the application or ask for collateral or guarantee to approve your credit application. Hence, start your credit journey as early as possible and stay financially responsible at all times to make the best out of your credits.
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Forming the right habits can help us improve our lives and so can these habits improve your financial health. Whether you are a newbie with a NA CIBIL score, one with a poor credit score trying to improve your score, or one with a good credit score, follow these top 10 habits to build and maintain a good CIBIL score.
At what time gap should I check my CIBIL score?
Depending on your financial activities, you can decide the checking frequency. It is recommended to check at least twice a year.
Will there be any negative impact if I don't check my CIBIL score?
There is no direct negative impact. However, if your credit score is decreasing you may not know and cannot fix that. Also, if there is any wrong detail in your payment report, you may miss it, which will negatively impact your credit score.
If I don’t use any credit products, should I worry about my CIBIL score?
Financial emergencies come unexpectedly. In such stressful situations, you will have no choice other than to opt for a loan. If you regularly maintain a healthy credit score, you can easily and quickly avail of loans in such emergencies.
Will my friend's loan repayment history for whom I have co-signed affect mine, too?
If he/she misses or delays payments or EMIs, then that will affect yours, too, as you have signed as a guarantor. Note that even single missed or delayed payments will have an impact on the credit score.
What is the CIBIL credit score that I should aim at?
CIBIL score above 650 is considered good, and lenders will be ready to approve your credit applications quickly and easily. But if your credit score is more than 750, then that is an excellent score, and you can negotiate with the lenders for better interest rates, and there are chances they will accept your deal.
How long will improving my CIBIL score to an excellent score limit take?
That depends on your current score value and the steps you are taking to improve it. Certain factors will have more impact on improving the CIBIL score, while others may have a lower impact. It may take at least a few months to move your score to the next score level.
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