Whenever you apply for a loan, be it a home loan, personal loan, car loan, or credit card, lenders will check your credit rating from CIBIL to determine your creditworthiness. TransUnion CIBIL Ltd. formerly known as Credit Information Bureau Ltd was established in August 2000 and is known to be the first Credit Information Company in India. The CIBIL Score usually ranges from 300 to 900 where 300 is the lowest and 900 is the highest. So if your score is below 650, it is considered a low score and if it is above 750, it is regarded as a high score.
Lenders usually expect you to have a score above 750 to be eligible for credit. Moreover, having a high score will help you get loans at lower interest rates. So if you have a poor CIBIL score, read this article further to know 7 habits you can implement to get a high score.
3 Myths About CIBIL Score
Here are some of the most common myths associated with CIBIL score:
Your CIBIL Score Does Not Affect Your Loan Eligibility
Your CIBIL score indicates your creditworthiness and your financial health. So if you have a high score, you will be seen as a low-risk borrower and will increase the chances of getting your loan approved. This will not only enhance your loan eligibility but will also qualify you for a higher loan amount at a lower interest rate. Therefore, your CIBIL score has a high impact on your loan eligibility.
Making Investments Can Harm Your CIBIL Score
Making investments will help you secure your future finally without harming your CIBIL score. However, if you fail to repay your EMI on time, it will have a negative effect on your CIBIL score. Therefore, making investments will not affect your CIBIL score.
You Cannot Get Your Loan Approved With a Low Credit Score
Getting a loan approved will become difficult if you have a low CIBIL score. However, few lenders may still approve your loan even if you have a low score. Moreover, you must also note that lenders will charge you high-interest rates. Therefore, you can get your loan approved with a low credit score.
Why Is Your CIBIL Score Low?
Sometimes your CIBIL score may be reduced because of your past behavior. Here are some of the common mistakes that you might be making:
Outstanding Credit Card Balance:
If you fail to repay your total credit card bills every month and pay only the minimum due amount, you will have an outstanding balance on your credit cards. As a result, it will lower your CIBIL score.
Too Many Loans or Credit Cards:
If you apply for multiple loans or credit cards, each lender will check your credit score. This process will get recorded as a hard inquiry. And multiple hard inquiries will affect your CIBIL Score in a negative way.
High Credit Usage:
If you use more than 30% of your maximum credit limit, it will affect your score negatively as it indicates that you depend a lot on credit for your expenses making you seem credit hungry.
Delay In Repayments:
If you delay in making repayments, it will get recorded in your CIBIL report, which will further reduce your credit score.
Importance of Monitoring Your Credit Score Regularly
You must not ignore the importance of having a good credit score as it brings you closer to your goal of owning a house or a car. A high credit score will help you get loans to cover sudden financial requirements. So let us look at the importance of having a good Credit Score:
- If you have a high credit score, you will easily become eligible to get a loan or a credit card.
- You will have the extra benefit and can easily negotiate with your lenders for lower interest rates for loans.
- With a credit score above 750, you can get discounts on credit cards with benefits and rewards.
- A high score shows that you have responsible repayment behavior, so you can even ask for a higher loan amount
Role of CIBIL Score in Loan Approval
Banks and financial institutions determine your creditworthiness by checking your CIBIL score and using it while making a lending decision. So here are the different ranges of a CIBIL score.
|CIBIL score range||Credit health|
|300-549||● Poor CIBIL score
● Irregular repayment behavior
● Payment defaults
● High credit exposure
● High risk of turning a defaulter
|550-649||● Fair CIBIL score
● Late payment of credit card bills/EMIs
● Multiple credit inquiries
|650-749||● Good CIBIL score
● Responsible repayment behavior
● Long credit history
● Eligible to avail loan and credit card
● Might have to pay higher interest rate
● Low risk of turning a defaulter
|750-900||● Excellent CIBIL score
● No defaulted payments
● Timely payment of bills
● No unpaid dues
● Responsible credit handling
● Cheaper interest rates
● High negotiation power
● Clean credit report
Factors that Affect your Credit Score
The payment history accounts for 30% of your Credit score. It shows whether you repay your loan consistently on time. So if you miss the payment by more than 30 days, your credit score will be affected. Moreover, if you default on your loan, it will have a negative impact on your credit score.
It holds 25% of the credit score and indicates how much you use your credit which is also known as the Credit Utilization Ratio (CUR). So if you spend more using your credit, it will be seen as negative financial behavior. Therefore, maintain your credit utilization ratio below 30% of your income.
Number of Credit Inquiries:
It accounts for 20% of your credit score. So when you apply for a loan, lenders will check your credit score which will be recorded as a hard inquiry. Therefore, if you apply for loans from multiple lenders, there will be multiple hard inquiries recorded which will ultimately lower your credit score.
Length of Credit History:
If you have a long credit history, lenders will know that you can repay your loan and your score will also increase. So keep your old accounts open even if you don’t use them any longer.
Having a mix of credits such as home loans, education loans, car loans, etc will increase your score significantly as it shows you can manage your credit very well.
10 Essential Habits For A High CIBIL Score
Even if you meet all the required eligibility criteria such as your age and monthly income for a loan, your loan applications may still get rejected if your CIBIL score is low. Therefore, the best way to avoid such a situation is to implement the following 10 habits that will help ensure that the CIBIL score does not suffer.
Check Your Credit Report:
Build a habit of checking your credit report frequently so that you can easily know more about your credit health, and payment status, and identify potential errors.
Make Corrections to Errors:
If you find any error in your credit report, you have to raise the dispute immediately by visiting the official website, www.CIBIL.com. Moreover, you have to report the error within 30 days and rectify the same.
Credit Utilization Ratio:
Avoid using your credit card for all financial transactions as it will affect your credit utilization ratio. Therefore, maintain the ratio at 30% or less. By doing this, you will see a significant improvement in your CIBIL score.
Don’t Keep Applying For Credit If Rejected:
Do not apply for a loan immediately after you have been rejected by another lender previously. The reason is that the information will be recorded in your credit report which will in turn affect your score. Therefore it is better to improve your credit score first before you apply for a loan again.
Keep The Frequency of Applications Low:
Do not apply for loans from multiple lenders. This is because each time you apply for a loan, lenders will check your credit score to determine your credibility. This credit check will be recorded in your credit report as a Hard inquiry. And if there are multiple hard inquiries, it will reduce your credit score and will make you look credit hungry.
Repay on Time:
Once you get your loan, make sure you repay your dues on time. And if you have any outstanding loans or missed out payments, start repaying as soon as possible.
There are 2 types of loans such as secured and unsecured loans. If you apply for too many unsecured loans, lenders will perceive it as irresponsible financial behavior and might reject your loans. Therefore, have a balance of both secured and unsecured loans as it will show that you can manage both types of loans.
Keep Your Old Credit Accounts Open:
Do not close your old credit account even if you do not use them any longer. This will increase the length of your credit history which will in turn increase your credit score.
Do not apply for a loan more than you require. The reason is that you might find it difficult to repay your loan amount on time which will again affect your credit score. Therefore, plan your requirement and avail of the loan amount only for what you need.
Watch Out For Joint Applicants:
Sometimes you might have to suffer even if it’s not your fault when you have a joint applicant. The reason is that if the joint applicant is not able to repay the loan on time or if he/she defaults on it, it will reduce your credit score as well.
Precautionary Steps To Maintain a High CIBIL Score
A low score will make it difficult to get your loan approved as lenders will consider you a high-risk borrower. So to avoid getting into such a situation, you have to take precautionary measures to maintain a good CIBIL score. So here are the steps you can take to do so:
Check Your Current CIBIL Score:
Check your CIBIL score to know your current credit status and also check if any rectification is needed.
Check Your Details In The Credit Report:
Once you get your credit report, check if all your information such as your bank account, loan details, credit card details, your identity, the status of your account, etc are accurate.
Know Where You Went Wrong:
It is important to know how to read your credit report so that you will know why your score has dropped.
Identify Potential Errors In Your Credit Report:
Sometimes errors in your credit report can occur when your bank or lending institution gives information to CIBIL. Such errors can lower your score. So if you find any error, you have to report a dispute to CIBIL by sending a request form. Sometimes, errors can occur in Account balances, Overdue loan amounts after repayment, Identity theft, and details of a loan that you have not availed.
Be Open To Changing Your Credit Behaviour:
Once you know the reason why your score has been reduced, you have to take constructive measures to improve your score. Find ways to clear all your missed out and outstanding debts.
Speak To Your Lenders:
If you have issues and are confused about how to improve your score, you can talk to your lenders and get ideas to build your credit score and clear all your pending debts on time.
Maintain Your Score Above 750:
Once you have increased your credit score above 750, you have to maintain low balances on your credit cards, make loan repayments on time and maintain a diverse credit mix like secured and unsecured loans.
Also Read: Top 5 CIBIL Score Improvement Factors
You must always remember that your credit history can drop if it is not maintained. The main purpose behind implementing these habits is that it will ensure that you don’t have to worry about your credit history and your financial health. Moreover, you need not worry about getting rejected for a loan or credit card. So if you are looking to get a personal loan, you can easily apply using Buddy Loan and also check your credit score using Buddy Score. This will help you keep a track of your credit status before applying for a loan.