A CIBIL score is an indicator of your creditworthiness which is displayed in a numerical format. It ranges from 300-900 and usually a score above 750 is considered good/high rating. And a higher CIBIL score will get you good deals on interest rates for loans or while applying for a credit card. Majority of the lenders such as banks and Non-Banking Finance Companies (NBFCs) often sanction loans or credit cards to people who have a CIBIL score of above 750. Therefore, a low CIBIL score reduces your chances of getting a personal loan or any other credit. So, you have to use your credit card carefully to maintain a high CIBIL Score. Moreover, your CIBIL score is made up of various components and each of these having a different weightage.
Who Calculates Your CIBIL Score?
CIBIL scores are calculated and generated by TransUnion CIBIL credit bureau after taking into consideration different factors including payment history, credit type, the age of the credit, and other factors.
So let’s take a look at factors that impact your CIBIL score in detail.
|Components of CIBIL Score||Weightage|
|Length of credit history||15%|
|Type of Credit||10%|
Your payment history is one of the major key factors that decides your credit score. It shares almost 35% of your total credit score. Hence, it is extremely essential to pay all your bills on time and also have a consistent payment record. Make sure you don’t default on your payments as it will negatively affect your credit score. If you do not have a good repayment history, banks and NBFCs will consider you incapable of handling credit.
Credit Exposure Or Amount Of Debt
The amount of debt or the credit exposure accounts for 30% of your total credit score. So be aware of your current financial status and take only that amount of loan that you can repay. Taking an excess loan that you won’t be able to repay shows that you are credit-hungry. So maintain a low credit utilisation ratio (the total amount you owe and your total credit limit) on all your accounts. Ideally, you should use 30% or less of your credit limit. Because having more debts can harm your credit score. So always focus on minimizing your debt as it will help in improving your credit score.
Age Or Length Of Credit History
The age or length of your credit history holds for 15% of your credit score. Credit bureaus like CIBIL consider the average number of years you have been having a credit account. Therefore, having a decent credit age good credit score as it indicates that you have a lot of experience in managing credit.
Type Of Debt Or Credit Mix
Debt can be classified into secured and unsecured. And your credit score will boost if you have a mix of both types of debts. This essentially means it is good to have different loans such as a car, home loan, a credit card, etc. Moreover, it shows that you have a good experience in managing different types of credit accounts. Therefore, credit mix holds for 10% of your total credit score.
Credit inquiries holds for 10% of your total credit score.The number of loan applications a person makes to get credit will be reflected on your credit score. So each time you enquire about a loan or credit card, an inquiry is recorded on your credit report. These requests can reduce your credit score as they make you seem credit hungry.
Mistakes That Actually Harm Your CIBIL Score
Though the above mentioned factors affect your credit score, you need to still be careful and avoid making certain mistakes. So here are some of the mistakes that can negatively affect your CIBIL score.
Missing Out On Payments
Since your payment history holds 35% of your CIBIL score, it is extremely important to pay all your dues or EMIs on time. Because delay or missing out on paying bills or making late payment of bills can reduce your CIBIL score. So to make sure that your CIBIL score does not reduce, you can set reminders on your phone. Or you can set up an auto-debit facility on a scheduled date to pay your dues. This way, you can pay all your credit card or loans on time thereby improving your CIBIL score.
Maintaining Your Credit Utilisation Ratio High
A Credit Utilisation Ratio is the percentage of the credit limit that you have used at a given point of time. You should maintain a low credit utilisation ratio to improve your CIBIL score. Many financial experts suggest that people should use less than or equal to 30% of their total credit card limit. Because if you use up the entire credit card limit, it indicates that you don’t have the ability to pay your bills on time and are unable to manage your credit.
Availing Loans More Than Required
You have to avail of a loan only if you require and know that you can repay it. Moreover, it is good to have a balance of both unsecured and secured. However, if you take loans more than what you need, you will fall into debt burden and might miss out on paying your dues on time which will ultimately reduce your CIBIL score.
Making Multiple Credit Inquiries
Credit inquiries hold for 10% of your total credit score.The number of loan applications a person makes to get credit will be reflected on your credit score. So each time you enquire about a loan or credit card, an inquiry is recorded on your credit report. These requests will reduce your CIBIL score as they make you seem credit hungry.
Having No Or Low Credit History
When you apply for a loan, having a credit history will help the lenders to understand how you have managed your credit over the years. Therefore, it is always better to have a long credit history. Because, the length of the credit history shares 15% of your CIBIL score.
Not Checking Your CIBIL Report
You have to check your CIBIL report frequently as it gives you track of your current credit status. And sometimes errors in your report can reduce your CIBIL score. So if there is any error in your credit report or unauthorised sanction of loans in your name, it can affect your CIBIL score in a negative way.
Closing Old Credit Accounts
Your old credit accounts will have a long credit history. So if you close them you will lose the weightage of your credit history. Therefore, do not close your old credit account even if you no longer use it.
Also Read: How Late Payments Affect Your CIBIL Score?
Benefits of Having A High CIBIL Score
- Quick approval of loans and credit cards
- Low interest rates on loans
- Attractive deals on credit cards
- Credit cards with high credit limit
- Discount on other charges like processing fee for loan applications
It is important to check your CIBIL score from time to time. Make sure your score is above 750 to enjoy better access to credit products. You are entitled to receive one detailed credit report for free from CIBIL per calendar year.
How To Increase Your CIBIL Score?
Repay Credit Dues on Time
Make sure you pay your credit dues on time. The reason is because your payment history accounts for 35% of your CIBIL score. You can also set reminders to pay your dues on time. This way, your CIBIL score will improve significantly.
Limit Credit Utilization
Keeping your Credit Utilization ratio to less than 30% of your credit limit will help in preventing damage to your credit score. On the other hand, if you do not use your credit, it will also adversely affect your credit score. So it is always better to pay off your credit card dues in advance.
New Credit Cards
Be aware while applying for credit cards. While credit cards are helpful when applying for loans, having more credit cards and making large purchases might prove to be counterproductive. When applying for a credit card, it is best to check your eligibility and then apply to banks where the chances of getting your loan application approved is higher. So make sure that you maintain a good gap when applying for new loans to prevent lenders from believing that you are credit hungry. Therefore, apply for credit cards only when you can repay as it will help in increasing your score.
Keep A Check on Your Credit Report
Keep an eye on your credit report from time to time for potential threats, frauds and errors. Moreover, Credit bureaus offer borrowers one free credit report a year as per law.
Online websites have made the process of monitoring credit reports simple. Sometimes, the report might have errors like incorrect information, delay in updating the report or a delay in updating any details in your report. These errors can severely affect your credit score. So if you find any errors, you have to report it to credit bureau and rectify them instantly.
Opt For Different Types of Credit
Credit, if obtained wisely, is helpful because a person who has never availed any form of loan will negatively impact your CIBIL score which can make it challenging for them to obtain loans. Hence, it is suggested to include various types of credit in your portfolio that include a mix of both personal and secured loans, long and short term loans to improve your credit history. This will help in improving your chances of getting a higher loan amount at a lower rate of interest when you plan to apply for a loan.
Increase Your Credit Limits
If you increase your credit limit, your credit utilization ratio will instantly become lower and ultimately boost your credit score. Because if you over utilize the credit limit beyond a certain limit, it will result in categorizing you as a high-risk borrower. And if you use the full credit limit (or beyond a certain limit), your credit utilization ratio (CUR) will also increase significantly, thus it will increase the risks of default. Although the risks apply to you, it will negatively impact your CIBIL score. Hence, it is a clever option to increase your credit limit before any additional spending. By doing this, you will get the opportunity to manage your credit carefully and you can keep your credit utilization low, which will in turn increase/maintain your credit score.
Keep Old Debt on Your Report
Your credit score is a snapshot of your credit behavior based on which the lender approves the loan application. Therefore, keeping the records of your old loan account in your credit report is good for your credit score. Also, one of the easy ways to improve your credit score is to keep your old credit accounts active where you have a solid repayment history for a long time. This is the most common tactic used by entrepreneurs. They make sure to keep their old credit account active for as long as possible as it will impact your CIBIL score .
A CIBIL score is an indicator of your creditworthiness which is displayed in a numerical format. It ranges from 300-900 and usually a score above 750 is considered good/high rating. And a higher CIBIL score will get you good deals on interest rates for loans or while applying for a credit card. After all, a debt that is repaid following the agreed terms within the stipulated time frame increases your creditworthiness and has a positive impact your CIBIL score. Moreover, It is important to check your CIBIL score from time to time. Make sure your score is above 750 to enjoy better access to credit products. You are entitled to receive one detailed credit report for free from CIBIL per calendar year.
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