Factors affecting your CIBIL Score

Your CIBIL score essentially helps lenders decide whether or not you should be given a loan. Your CIBIL score depends on factors such as your credit behaviour, loan repayment history, credit mix, and the nature of your existing loans (secured or unsecured). 

 

The credit you used in the past can also be responsible for the ups and downs of your score. Understanding the factors affecting your CIBIL score in detail helps you use your credit card more effectively. 

Several factors influence your CIBIL or credit score and contribute to bringing down the number. Check out what is affecting your credit score.

• Length of Credit Record

The age of your credit record generates a clear insight into your financial health. It essentially means that you have been in the credit system for a significant period, which allows the lender to better evaluate your credit management skills. 

 

On the other hand, it is not favourable for lenders to ascertain your repayment behaviour in the absence of an aged credit record. Lenders are likely to steer away from lending funds in uncertain situations.

• Credit Repayment History

Your credit repayment history provides an insight into your ability to make credit repayments. It is also the most important component considered when evaluating your credit score. The repayment record reflects your ability to diligently meet your financial obligations through timely credit and EMI payments. 

 

When you default on any credit card dues or do not make your loan repayment within the stipulated time, it harms your credit health, leading to a significant drop in your credit score.

• Credit Utilisation Ratio

The credit utilisation ratio reflects your hunger for credit. It is the ratio of your credit utilisation to the total amount of credit limit available against your account. When you exceed your credit utilisation ratio, your profile is viewed negatively by the credit bureaus. 

 

It essentially increases the probability of you defaulting on loan repayments. As a rule of thumb, limit your credit utilisation to about 25-30% of the credit limit offered to you.

• Credit Mix

The credit score is also greatly influenced by the mix of credit accounts in your loan portfolio. A portfolio essentially includes the number of secured and unsecured credit lines in your name. As the name suggests, a secured loan is backed by collateral in the form of an asset. 

 

A non-secured loan, on the other hand, is offered without the security of collateral. Managing a mix of loan EMIs and credit card dues proves your ability to manage the different kinds of available loan options. It further helps strengthen your credit history and makes your profile appear creditworthy.

• Not Making Repayments Responsibly

The way you manage your repayments has a big influence on your score. Make it a habit to pay your loans and credit bills on time as per the schedule. Even a 30-day delinquency in making a repayment can reduce your score by a mighty 100 points. 

 

Set up reminders and alerts to ensure that you make your payments on time. Lenders view you as an irresponsible borrower when you miss repaying your credit.

• Outstanding Debt

Outstanding debt can significantly impact your credit report. Make sure that you immediately clear outstanding debt. Records of unpaid debt can heavily influence your score for the worse. Make sure that you repay big and small payments at the earliest.

• Not Paying More than the Minimum Amount Due

If you continue to pay only the minimum amount due on your principal each month, then your debt trap increases. It also leads to an increase in compounding interest. Therefore, it is essential to pay your credit card bills on time and in full.

• Applying for Multiple Credit Products

Each time you apply for a credit product, the lender pulls out your credit report. This action is also known as a hard inquiry. When you send out multiple applications, there are multiple hard enquiries recorded against your account. 

 

Not only will this affect your score, but also exhibit your hunger for credit. Take some time off before you apply for the next credit product, especially if your application is rejected at first.

• Errors in the CIBIL Report

Errors in the CIBIL report are a common occurrence. They can range from incorrect personal information to wrong balance inputs. These errors have a direct effect on your credit score and you need to watch out for any discrepancies. 

 

Keep track of your credit history and be quick to rectify errors.

• Closing a Credit Card

Closing a credit card can negatively impact your credit score by increasing your credit utilisation ratio, reducing your available credit, and shortening your credit history. It may also lower the diversity of your credit accounts, which lenders assess when determining your financial responsibility.

• Co-signing a Loan

A default on the loan can negatively impact your credit score. The loan will appear on your credit report and may affect factors such as the average age of accounts and the variety of credit types. These elements play a significant role in determining your credit score. 

• Loan Settlement

Settling a loan significantly impacts your CIBIL score. It indicates an inability to repay the full amount, leading the lender to accept a reduced sum as full payment. Your credit report will reflect this as "settled" rather than "closed," which results in a substantial decrease in your credit score.

Your CIBIL score reflects how responsibly you manage your credit. For this reason, issuers rely on the scores as an indicator. With a good credit score, you can: 

• Increases Loan Eligibility

A good CIBIL score improves your loan eligibility chances. An exceptional score suggests that you are a responsible borrower who is disciplined with his/her finances. Lenders prefer individuals who manage their debt responsibly, as they are more likely to present the best credit card and loan offers. 

 

Demonstrating financial discipline increases your chances of receiving favourable terms and competitive rates.

• Low Rate of Interest

The most notable benefit of having a high CIBIL score is that lenders offer you the best rate of interest on your loans. Having a good score also gives you an upper hand when negotiating the rate of interest levied on credit products.

• Rewarding Credit Cards

A good CIBIL score will help you get the best credit cards with the most lucrative benefits. Lenders are likely to offer you high-value credit cards to choose from when your score is above 700.

• Future Proof Your Finances

Irrespective of whether you plan to apply for a credit card or loan at present, you must continue to maintain a good CIBIL score. A high score will be an asset in the future whenever you plan to apply for a home loan, personal loan, or even a credit card. Always prioritise a good credit history.

CIBIL typically updates the score every 30 to 45 days, though this depends on the reporting cycle of banks or financial institutions. However, certain factors can delay the cycle, such as:

• Report of errors or disputes

• Loan/EMI payments