CIBIL is the body recognised by RBI and other financial institutions that monitors credit transactions of individuals and commercial entities and maintains a database of credit reports and scores. Established in 2000, CIBIL or the Credit Information Bureau of India Limited (CIBIL) has a track record of people’s loans and credit activities. Therefore, a CIBIL score is one of the essential parameters to know an individual’s ability to repay a loan and ascertain his creditworthiness.
A CIBIL score is a numerical representation of an analysis of an individual’s ability to repay loans based on their credit history. Lenders like banks and other financial institutions use this CIBIL score to determine a borrower’s creditworthiness. And one of the key things to have a good credit score shows timeliness of repayment made by an individual. If you are regular with your payments, it is highly likely that your credit score will increase and you will not be denied new loans.
This is because the lenders can easily evaluate the risk of the borrowers using tools like credit score and credit information report (CIR) which is affordable and efficient. And this gives them an assurance of responsibility and credibility of their loan. However, you must note that CIBIL by itself cannot alter a person’s credit score.
There are several factors that negatively affect a good CIBIL score which includes the frequency and severity of late payments which raises the question: does every single missed or late payment impact your CIBIL score?
Delayed Payments And Credit Scores
To have a good credit score, it is important for you to pay back the principal with interest within the time stipulated. Here are three ways delayed payments could harm your CIBIL score and your pocket. These are:
Default Makes Fund Allocation Challenging
Lenders consider your timely repayment schedule to distribute their funds to other borrowers, and if you default, it prevents them from lending funds to other borrowers. For this reason, they will be charging you a high penalty. And when they report your default to CIBIL, they are indirectly conveying that you are a ‘risky’ borrower to other lenders.
A low CIBIL Score Can Be Hard To Erase
When banks and other financial institutions report defaults, CIBIL updates those defaults on its score and considers it as ‘status quo’ until the bank communicates. And this can be very hard to remove and may take months or years of sustained and responsible behaviour of the borrower (by making adequate, and timely repayments) to regain a normal or high CIBIL score.
It Nullifies Your Accumulated Reputation
Even if you have paid off your instalments timely in the past, one default or one missed out payment could erase the whole accumulated reputation from your credit score. As a result, you will find getting loans extremely difficult in the future.
It Could Hurt Your Pocket
When you sign the loan agreement with a bank or financial company for a loan or a credit card, the contract will also include penalty rates for late payment fees for any delayed payment and you will have to end up paying..
Therefore for any form of loans be it Personal Loans, Two/Four Wheeler Loans, Home Loans it is very essential for every borrower to have a good credit score above 750 when you plan to apply for a credit.
As A Borrower, What Steps Can You Take?
If you are a credit card or personal loan holder, know that all your transactions are recorded by CIBIL and your credit report might get affected if you do not clear any outstanding dues on time or make a default.
Come what may, always try to settle your credit card bills in full because a late payment can have an adverse impact on your credit report and it can take months, even years to get rid of. Similarly, if you make a delayed payment or default on your loan instalment, banks and financial institutions may raise an adverse report to CIBIL.
How To Avoid Late Payments?
Keep Your Details Updated
Sometimes you might forget to update your details like the latest address, phone number and email ID with the bank or finance institution. Or sometimes your credit card statement or the instalment notice may not reach you on time. So to avoid this, always keep your personal details updated with the lender so that you can make timely payments.
Auto-Debit Your Salary Account
If you have given your salary account to your lender or the bank, you may give a standing instruction to your loan provider to debit the amount required for repayment by a particular date. This works well when the borrower is very busy and does not have time to keep track of your loan payments.
Spread Your Credit Usage Over Multiple Cards
If you hold many credit cards, it is good to spread your payments across cards rather than concentrating on just one particular card. This will help you maintain your credit utilisation ratio.
Convert Your Dues To EMIs
Some credit cards give you the option to convert the outstanding dues on your credit card into EMIs. So if you think you have difficulty in paying your outstanding dues on the due date, you can convert your dues into EMIs which makes it easier to pay on time.
Give Some Time If You Pay By Cheques Or Third Party Payments
Sometimes you may make your repayments by using a cheque or third party services like Bill Pay to make payments. But you have to remember that a cheque or a third party payment will take two to three days’ time to be cleared.
Borrow From Your Friends But Pay In Time
Sometimes, if you do not have enough funds to make repayment on time, you can ask your close friends or relatives for a short-term loan to make payment without fail. Because if you miss the deadline it can negatively affect your credit score.
Impact Of Delayed Or Missed Payments On Your CIBIL Score
Yes, a single missed payment or delayed payment can negatively affect your CIBIL score which will ultimately decrease your credit worthiness. As a result, banks and other financial institutions might not approve loan requests or reduce your credit limit when you want to get a credit card if your CIBIL score is low. Credit card issuers would like to ensure that your payment record is clean before they offer you higher credit limits.
What Is A Good CIBIL Score?
Lenders usually expect you to have a credit score of above 750 as it represents that you have the ability to repay the loan amount on time. And moreover, a good credit score will increase your credibility as a borrower and your financial status. The main benefits of having a good credit score is that you can easily get your loans approved at comparatively lower interest rates.
Mistakes That Actually Harm Your CIBIL Score
Here are a few of the mistakes that can actually impact your CIBIL score.
Missing Out On Payments: Your payment history holds 35% of your CIBIL score, so 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. Moreover, you can set reminders on your phone to avoid missing payments.
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. So you should maintain a low credit utilisation ratio to improve your CIBIL score. Moreover, you should use less than or equal to 30% of your total credit card limit.
Availing loan amount more than required: You have to avail of a loan only if you require and know that you can repay it. Because 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.
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.
Credit Limit 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.
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 the 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.
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 .
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.
Therefore, the key to maintaining a good CIBIL score is to have a basic financial discipline. Because, most of us underestimate the importance of making payments on time and, therefore, end up paying our bills past the due date. So it is important to understand the importance of your CIBIL score for your financial health. Moreover, It is important to check your CIBIL score from time to time. And make sure your score is above 750 to enjoy better access to credit products.
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