What is CIBIL Score?

CIBIL score is a tool to assess the creditworthiness of individuals and corporates. The consumer score denotes the score of an individual and the commercial score indicates the score of a corporate. A three-digit numeric summary of your credit history which gives an insight into your financial discipline and credit profile is the CIBIL score.

300 to 900 is the dimension of this score. If your score is towards the 900 range, it is considered an ideal score and you can expect pre-approved offers from lending institutions. Any applicant with a score closer to 900 is considered a low-risk borrower and the lending institutions are on the lookout for such candidates.

This score is derived from the information available in the Credit Information Report (CIR). The information in the CIR is provided by banks and other financial institutions at monthly intervals. The information comprises of the details of debt accumulation, payment history in respect of the loans, and the type of facilities with account numbers.

Lending institutions consider this to be a perfect tool to assess the creditworthiness of the applicant before continuing with the processing of the loan application. If the score is not satisfactory, the proposal will be rejected at this stage itself.  Knowing your credit score before applying for a loan is a pre-requisite. If you are planning to invest in a property by availing a loan or intending to meet the education expenses or marriage expenses of your children by availing a loan, then it is important to manage the credit score.

Managing the credit score can be done by checking the scores periodically for accuracy. Any discrepancy noticed should be reported and the rectification sought from the CIBIL grievances redressal forum immediately. If you realise that your credit score has declined due to discrepancies or any inappropriate information in the credit report at the time of applying for a loan, then the processing of the loan will be delayed. The rectification process requires ample time due to which the processing of your loan will be delayed. To avoid this situation, you will have to keep a track of your credit score.

How to Improve the Credit Score?

If you check your credit score and realise it is not the level of score that you desire, then you should adopt measures to improve the score. When you get your scores and the report, you can get an idea about the factors that are affecting your scores the most. You will have to focus on these factors and work towards improving those factors. The payment history and the credit utilisation constitute the major part of the scoring. Up to 70% of the scoring depends on the payment history and credit utilisation. If you want to keep your score at the desired level, these are the two main factors that must be efficiently managed.

To efficiently manage the credit score, you must focus on the areas mentioned below:

Keep your oldest credit card

There are times when you have been holding a credit card for years, but have not been using it. Sometimes you would even contemplate surrendering the card if you are paying an annual fee for no reasons. It could be an old card which does not have any attractive offers.

The availability of the card could tempt you to overspend and that is the reason you might want to surrender the card. Whatever be the reason, it is advisable to keep the oldest credit card which has created a long credit history for you. The longer the duration, the better will be the score if the payments have been honoured on time. All you must do is use the card minimally and pay off the dues on time. Then both the purposes will be served. You will be creating a robust credit history while you are keeping a track on your expenditure.

You might wonder how the retention of the oldest credit card could impact your credit score. The longest credit history forms 15% of your credit score. By closing the credit card, the length of your credit history will be shortened, which will impact your credit score.

The record of closed credit cards will be retained in the credit report for over a period of 5 years. This means the payment history in respect to your closed credit cards also will be retained. The fact that you have been holding a credit card for a long time and the dues on these cards had been paid promptly will remain and will have a role to play in determining the credit score. However, the only concern will be shrinking the length of your credit history, which forms 15% of your credit score.

The next concern will be the diminishing credit limit. By closing the credit card, the available credit limit will be reduced to that extent. If a new credit limit is not added, the credit utilisation ratio will go up consequent to the closure of the credit card. This will have a negative impact on the credit score.

It is recommended to keep the oldest card active by using it nominally just to keep it active.

Pay EMIs on time

Payment history is the major factor that determines your credit history. A good payment history reflects your commitment towards paying off dues on the due date and your capacity to repay debts on time. You gain the confidence of the lenders as far as your financial commitment is concerned if your payment history is good. The primary concern of any lending institutions while sanctioning a loan will be whether the repayment will be done promptly and within the due date. A credit report which gives them a picture of prompt repayment of dues will be the one they will be aspiring for. Good payment history will make you the most eligible candidate for a loan. The reason being, the past payment performance predicts future performance.

A written off account or a settled account is not a good indicator. An account will be written off only when all the recovery measures of the lending institutions fail, and they conclude that the recovery of the dues is not possible. This portrays your incapacity to manage your financial commitment.

A settled account where you will have paid an amount much lesser than the agreed amount as per the contract is not good either. This shows that your debt accumulation is more than your affordable level and you will be considered as a high-risk borrower.

A loan past due remark in the credit report represents your failure to honour your debt payoffs within the due date, which is also not a good indicator.

To avoid all this, you ensure that you make the payment of your loan and credit card dues well within the due dates. If you are pre-occupied and are not able to remember the due dates of all your loans, it is better to opt for an auto-debit option to pay off the EMIs on time. However, even in this case, you should ensure the availability of sufficient balance in your bank account to honour the auto-debit. By doing so, you will be able to manage your credit score efficiently.

Keep an eye on your credit utilisation ratio

Credit Utilisation Ratio (CUR) is the other major factor apart from payment history, which affects your credit score. Keeping the CUR at 30% is recommended to keep your credit score at a good level. The ratio between the credit limit and the credit used is the Credit Utilisation Ratio. Increase in the CUR describes you as a person who is depending on the loans and credit cards for managing expenses.

CUR can be kept at an optimal level by keeping a track on your credit card spends and by paying off the dues on or before the due dates. Aim at paying the credit card dues in full instead off opting for a revolving facility. With a revolving facility, the balance on the credit card will mount up, which will eventually increase the CUR.

If at any point in time you feel that the dues on the credit cards have mounted so high that you are unable to make payments, it is advisable to go for a balance transfer or for debt consolidation by availing a personal loan which will be available at a much lower interest rate compared to the interest you will be paying on the credit card outstanding.

A better way to manage the CUR is to get an enhancement in the credit limit. Regular enhancements in credit limits are not advised since it will tag you with a reputation of not being able to manage your expenses from any other source other than the loans and credit cards.

It is necessary to keep a regular watch on the CUR in order to take steps to restore it to the required level.

Set reminders for payment and be disciplined with credit

If you have multiple credit cards and various loans, it is better to diarise or set reminders for the payment due dates so that you will not miss out on any due date. It is possible that you miss out on one or two due dates and will end up paying the dues with delay. Apart from losing on the credit score, you will also be paying a penalty for the delayed payment.

To be financially disciplined, you must meticulously plan the payment of the credit card dues and the loan outstanding. You can either opt for an auto-debit or set reminders for all the payment due dates and make the payment promptly on the due dates. By doing so, you can maintain the credit score at the desired level.

Customise your credit limit

When there are add-on cards to a credit card, the credit limits are shared by the primary cardholders and the add-on cardholders. You as a primary cardholder can keep a check on your spends to ensure an optimum level of credit utilisation. However, the same may not be the case with the add-on cardholders. The primary cardholder is responsible for all the balances created on the add-on cards. You may even encounter a risk of an unexpected huge bill on account of the add-on card usage for which you will be primarily responsible. Even the credit utilisation level will go up with the increasing balance on the add-on card.

With this aspect in mind, now the credit card providers have enabled a facility to set spending limits on the add-on cards. You can set the spending limit keeping in mind the required CUR. The collective usage of the credit card should be within the limit that will keep the CUR at the required level.

Factors Affecting your Credit Score

The credit score is calculated by the credit bureaus using their proprietary algorithms. The criteria applied by each algorithm may differ, but there are some common determinants affecting the credit score.

Credit Utilisation Ratio

The ratio between the available credit limit and the usage of the limit is the Credit Utilisation Ratio (CUR). The lesser the CUR, the better will be your credit score. The CUR gives an account of your dependence on borrowed funds. A higher CUR is viewed critically by the lenders. The desired level of CUR is 30%. 30% of the credit score is derived out of the CUR. Keep track of your expenditure to maintain the ratio at an optimum level if you are an aspirant for a high score.

Payment history

Payment history is the key factor to determine your credit score. 35% of the credit score is derived out of the payment history. Ensure that all the EMIs and credit card dues are paid on time. Even a single EMI or a credit card payment missed out will have a negative impact on the credit score.

You should opt for an auto-debit or ECS payment facility to ensure that the payments are made on the due date. Your prime responsibility will be to ascertain the availability of funds on the due date to make the payments. Rest will be done automatically.

Combination of credit

Lenders are also concerned about the types of loans that are recorded in the credit report. A good mix of secured and unsecured loans shows your ability to manage funds. A greater number of unsecured loans are viewed negatively by lenders. Having different types of accounts, like personal loan, home loan, credit card, vehicle loan, etc., is an indicator of your capability to manage different type of debts. A balanced mix of the secured and the unsecured loan will have a good impact on your credit score.

If you have a higher number of personal loans when compared to the secured loans, the credit score will be impacted even if you have made the payments promptly. The lenders will be cautious while providing a fresh loan to applicants who have a higher number of unsecured loans.

Loan tenure

A loan with a longer repayment period with a good payment record will fetch a good score. The loan payment made promptly for a long duration depicts your consistent finance management acumen.

Multiple Inquiries

Every time you approach a lender for a credit card or a loan, a credit report is drawn, which will be recorded as an inquiry on your credit report. This inquiry will be retained in your credit report for a period of 2 years. Multiple loan applications within a short duration will impact negatively on your credit score.

The lenders draw an inference that you are in financial distress and are desperate for a loan or that you are being denied credit from various institutions. They will be sceptical about creating a new limit for such applicants. There are a lot of loan aggregators in the market who provide comparative data about the offers of various financial institutions.

If you are moving from lender to lender only with an intention to get the best deal, you can avoid it by accessing the website of the loan aggregators where you will get all the required information.

Checking your credit report for accuracy

There are instances of wrong reporting by lending institutions, which gives rise to entries that do not pertain to you. If the reporting regarding the closed account is not furnished by the lending institutions to the Credit Bureau, then those accounts appear as active accounts in your report. All these entries will scale down your credit score.

You will have to do a periodical check of your credit report for any such entries and get it corrected immediately. Rectifications will need ample time. It is better to get the rectifications done before you apply for a loan to avoid delay in the processing of the loan.

Enhancement in credit limit

Every time you place a request for an enhancement in the credit limit, the lender will access your credit report, which will reflect as an inquiry on your credit report. Frequent enhancements will give rise to multiple inquiries which will have a negative impact on your credit score.

FAQs

What are the ways to bring back the credit score to the desired level?

Proper management of your funds in order to make the payments of dues regularly is the first requirement to improve your credit score. The score would have declined due to defaults in your loan accounts and the credit card payments. Just regularising the accounts as a one-time measure will not help to scale up your scores. You should be disciplined in making the payments of EMIs and credit card dues and should not miss out on a single payment if you want the good score to be constant. Also, you should ensure to have more of secured loans and should aim at paying off the entire credit card outstanding instead of resorting to payment of the minimum amount due.

Do all individuals have a credit score?

No. All individuals will not have a credit score. The credit scoring models that are used to generate credit scores cannot operate without adequate credit information. There are individuals who have a very little credit history or no credit history. In such cases, there will be no credit report and so there will be no credit score either.

What is the periodicity for changes in the credit score?

The credit score will change with every added information in the credit report. The periodicity depends on how often new information is added to your credit report.

What is the impact of inquiries made for pre-approved limits?

No. Accessing your credit report for reviewing your account or for pre-approved limits will not affect the credit score.

Will the credit score of the borrower affect the score of the guarantor?

The credit score of the borrower will be good only if the payment history is good. If the borrower has defaulted the loan for which you are a guarantor, it will appear on your credit report as well, which will, in turn, have a negative impact on your score.

What are the advantages of a good credit score?

An application from an individual with a good credit score will be considered as a low-risk proposal which is in demand in the market. The interest rates and other charges are customised depending on the credit scores. Obviously, if you have a good score, you have a good scope to negotiate on the interest rates and other charges.

Does a default that has occurred years ago affect the credit score?

The credit information in your credit report will be retained for a period of 3 years. It takes a long time for the default to be wiped off from your credit report. Till such time the default will have an impact on the credit score.

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