Introduction to Factors Affecting Your CIBIL Score

Good credit health carries a lot of importance in the financial markets today, and your CIBIL score is a vital measure of your creditworthiness. It is the most important aspect lenders check when making a credit offering or approving a loan application. Leading credit bureaus generate your credit score after considering your credit exposure, credit repayment history, and outstanding debt, among other things. 

Understanding the Credit Score

As mentioned earlier, your credit score denotes your financial well-being as well as your creditworthiness as a borrower. The CIBIL credit score ranges between 300 and 900. A score that tips closer to 900 is considered excellent, whereas one below 650 is considered poor. Having a high credit score increases your chances of getting a loan or a line of credit. Lenders prefer those with a good credit score as the chances of default are low. As such, they check your credit score with the credit bureaus, known as a hard inquiry, before approving a loan or line of credit.

Read on to seek an in-depth understanding of the CIBIL score and its importance.

Factors That Affect the CIBIL Score

Several factors influence your CIBIL or credit score and contribute to bringing down the number. However, here are the prime factors that are likely to impact your credit standing.

  • 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 stir away from rendering funds in uncertain situations.

  • Credit Repayment History:

The credit repayment history provides a breakthrough 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 Utilization Ratio:

The credit utilization ratio reflects your hunger for credit. It is the ratio of your credit utilization to the total amount of credit limit available against your account. When you exceed your credit utilization ratio, your profile is negatively viewed by the credit bureaus. It essentially increases the probability of you defaulting on loan repayments. As a rule of thumb, limit your credit utilization to about 25-30% of the credit usage offered to you.

  • Credit Mix:

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

  • Debt to Income Ratio:

The debt to income ratio is widely considered by financial institutions before approving your credit applications. It indicates the level of open credit accounts that you hold and a higher ratio shows that you are already overburdened by monthly EMIs. It is best to keep your spending in check with a debt to income ratio that lies in the range of 25% to 35%.

  • 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 must watch out for any discrepancies. Keep a track of your credit history and be quick to rectify errors.

Importance of Maintaining a Good CIBIL Score

  • Increases Loan Eligibility:

A good CIBIL or credit 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 handle their debt well and inturn present them with the best offerings on credit cards and loans.

  • 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 loanpersonal loan, or even a credit card. Always prioritize good credit history.

Tips to Maintain a Healthy Credit Score

Here are some great tips that are easy to follow and will help you maintain a healthy credit score:

  • Make timely bill and EMI repayments

  • Avoid defaulting on bill payments

  • Maintain a favourable credit utilization ratio

  • Do not deactivate old or unused credit cards

  • Avoid applying for several loans or credit cards within a short period

  • Maintain a mix of secured and unsecured loans

  • Review your credit report regularly and flag off any discrepancies

  • Avoid making multiple credit inquiries

  • Monitor your co-signed, guaranteed, and joint accounts monthly

A high CIBIL score works amazingly well in establishing your strong financial capability among lenders. Apart from portraying your profile as creditworthy, it also ensures that you get the best offers when applying for credit. While you must follow all the above-mentioned healthy credit habits, you can check your credit score at Finserv MARKETS. You can also obtain a detailed credit health report through the same one-stop shop to effectively track your financial health. 

FAQs

  • ✔️What is a CIBIL score?

    The CIBIL score is a 3-digit numeric summary that reflects your credit behaviour. The score ranges from 300 to 900 and the higher your score, the better is your CIBIL health. Maintaining a high CIBIL score will fetch you the best financial opportunities in the form of loans and credit cards. 

  • ✔️What are the four factors that negatively affect the CIBIL score?

    The four major factors that affect the CIBIL score include a negative repayment history, high credit utilization, multiple hard inquiries, and high credit balance. 

  • ✔️Why does my CIBIL score affect my loan applications?

    The CIBIL score is an important aspect of your financial health and directly impacts your loan application process. When you apply for a loan, the lender runs a check of your CIBIL report and score. It essentially works as a first impression for the lender, and the decision to lend is primarily based on this score. The lender will decide to review your application only if your CIBIL score is accepatble as it is the benchmark of your financial well-being. 

  • ✔️Can CIBIL alter my records?

    No, CIBIL cannot alter your records. The CIBIL report is a compilation of records that are provided by banks and other financial institutions. 

  • ✔️What does an NA score mean?

    An NA score could mean that you do not have a credit history or have several credit cards with no credit exposure. 

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