A good CIBIL score means that an individual is likely to make repayments without delays and defaults. Higher credit scores help you get the best deals on credit cards and best interest rates on loans.
If you have ever applied for a credit card or loan, you would probably know the importance of maintaining a good credit score, especially if your application got rejected.
Credit scores below 750 are usually considered low by banks.
Banks are usually hesitant to extend loans or credit cards to people with a low score as they are perceived to be at high risk of default. However, some lenders may extend loans at higher interest rates or extend only secured loans.
CIBIL score is not just calculated based on your credit repayment history but many factors contribute to CIBIL score.
Factors that affect CIBIL score
- First time credit/loan applicant – Your CIBIL score will be low if you have just started your job or applying for the credit card for the first time in life.
- Repayment History – Your credit score will improve when you repay your loans and credit card bills on time.
- Utilization of credit limit – Credit score may fluctuate based on your credit limit utilisation.
- Debt servicing time duration – A longer duration of credit with timely repayments shoots up your score.
- Higher percentage of unsecured credit – Having a higher percentage of unsecured credit such as credit card loans, a personal loan is a big minus.
- Number of credit applications – Applying for too many loans or too many credit cards in short duration (six months) may have a negative impact on your credit score.
- Guarantor for loans – Be careful when standing as guarantor for loans taken by your relatives or friends. Their frauds may impact your score as well.
- Settlement of loans – Make sure you clear the principal, interest amount and applicable fees in full and close the loan account.
- Credit Mix – Having a mix of secured and unsecured credit gives you a positive score.
- Error in your CIBIL report – The banks and lenders, as well as CIBIL, handle a large volume of data. There can be possible slip-ups in reporting about repayments, loan closures etc. If you come across any such errors in your report, raise a dispute with CIBIL immediately.
Any failure to settle the loan will impact your CIBIL score negatively. If you fail to repay the loan completely, banks might try to reach a settlement with you to recover dues.
Banks mark such cases as ‘Settled’ and not as ‘Closure’. Settled cases reflect poorly on the CIBIL score. Which will make it extremely difficult for you to obtain any type of loan in the future.
How CIBIL score affects your creditworthiness
Having a good credit score is not an option but a necessity which determines how creditworthy you are.
Equation is simple, Good Score = Creditworthiness = Trust
Based on your credit score, banks decide how much loan amount can be sanctioned to you, at what tenure, and at what interest rate.
11 ways on How to improve CIBIL score
Follow the tips to improve CIBIL score and let me know in the comments what did you learn today.
Note: there are no such ways to improve your CIBIL score immediately. CIBIL score takes some time to get improved if you follow these steps.
#1. Clear your Credit Card dues
Any unpaid outstanding amount accumulated over a period of time not only increases your interest but also decreases your credit score.
For example, consider a credit card statement as below:
Total Outstanding Balance – Rs.1 lakh
Minimum Amount Due – Rs. 5000.
Monthly Interest Rate – 3.2%
Due Date – 20th Feb 2019
This means that you have borrowed Rs. 1 lakh from the bank and you are required to make a minimum payment of Rs. 5000 by 20th of Feb.
You will not be charged any interest if you pay the total outstanding balance in full.
If you choose to pay minimum payment (in this case Rs.5000) your outstanding will reduce to Rs. 95,000. However, you will be charged an interest of 3.2% which amounts to Rs. 3040. This amount will be added to your outstanding balance for the next month. This way, every month you are charged interest on the preceding month’s interest.
If you have an outstanding balance on multiple credit cards, try to consolidate all your debt into a single account. You can try taking a personal loan/mortgage loan and clear all the credit card dues or even borrow from friends or family members to clear the credit card outstanding.
#2. Keep balance in using the credit limit
You should ask for a higher credit limit from the banks and keep your utilization low. There won’t be any significant change immediately but slowly your score would change based on how you use your credit limit.
High utilization of the credit limit is an indication that your income does not suffice your expenses.
#3. Use the oldest credit card to maintain credit history
Hold on to your oldest credit card because that carries a proof of your borrowing and repayment histories over a long time.
A credit card account maintained over a long period of time with a good repayment track record gives a big boost to your credit score.
I have my oldest credit card issued in 2006 that improved my financial credibility over time.
#4. Get a secured credit card
If you are a student or housewife then you can get a secured credit card to establish your credit history.
Secured credit cards are issued against a fixed deposit by banks. You would get a credit limit of around 80% of the fixed deposit amount.
Keep making timely payments and your credit score would improve within 6 months.
#5. Accept any offers to enhance the credit limit of your credit card
Accept any offers to enhance credit limit even if you don’t require a larger limit. Offers to enhance the limit indicates that the bank has increased confidence in you.
Also, having a larger limit also means that your credit utilization percentage will also reduce, which is a positive sign.
#6. Opt for a loan of longer tenure
If you are planning to avail a loan, opt for a longer tenure and make timely repayments. Timely payments for a longer period give a positive boost to your credit score.
#7. Avoid applying for fresh credit
If your loan application gets rejected by any bank due to poor credit score, avoid applying for loans or credit cards with other banks or lenders immediately.
It is better to wait for a minimum period of 6 months to apply for fresh credit again. Frequent requests to CIBIL for credit score leaves a negative impact on the credit score.
#8. Raise dispute immediately to report inaccuracies
If you notice any errors in your CIBIL report about loan closures, repayments made or any errors in any your financial accounts, raise a dispute with the concerned bank or the lender immediately.
You may have to follow up your bank’s grievance redressal mechanism to collect the proof of loan closures.
You can read my experience of fixing my credit report by directly contacting CIBIL authorities.
#9. Be careful when giving a loan guarantee
Being a guarantor to a loan is considered as good as availing the loan by the banks.
Many banks may even sanction you a lesser amount of loan if you have become a guarantor to anyone else’s loan.
#10. Maintain a mix of secured and unsecured credit
To get a better CIBIL score, you should avail both secure credits like home loans and unsecured credit like personal loans and credit card.
Timely repayments to both secured and unsecured credit boost the lenders’ confidence in you and increase your credit score.
#11. Monitor your co-owned and joint accounts
If you have a co-applicant for your loan or a joint account or have given an add-on credit card to your family members, monitor such accounts regularly.
If your co-applicant is also paying EMIs on the loan, ensure that they make timely repayments.
If you have a joint bank account, ensure that minimum average balance as specified by the bank is always maintained.
A good score ensures that you can bargain for lower interest rates on loans and also get the best deals and offers on credit cards as well. For many companies, it is one of the background checks to ensure that an employee is not tempted to do financial misappropriation or fraud.
RBI empowers you to obtain one free of cost Credit Information Report(CIR) every year from each CIC. Presently, there are four CIC, means- you can avail four reports free of cost in a year. There is a possibility of having entirely four different scores even with the same set of credit information.
Reason- Each CIC uses a different algorithm to generate scores or may be due to lenders reporting your information to CICs on different days.
Share your experience & questions in the comments. Let’s help each other to get a better credit score.