Calls advertising personal loans are a source of annoyance to many Indians. But even if you decide to take these banks up on their offer, you may not be eligible if you have a bad credit history!
What a lender would usually do is look at your CIBIL score - a three-digit number that is assigned to you based on how you deal with your financial matters. A good CIBIL score is a sign of a fiscally responsible citizen, whereas a bad score hurts your chances of getting approved for a loan or line of credit.
Naturally, you want to bring your score up as high as possible to qualify for loans and meet your financial goals. But before we show you how to improve your CIBIL score, let's understand the basics.
Definition of CIBIL Score
TransUnion CIBIL is the agency that allocates a number known as the CIBIL score to bank account holders in India. If you are financially responsible, CIBIL looks favourably at your financial dealings and gives you a high credit score. On the other hand, if you default on your payments, you may receive a low credit score.
What Is Considered as a Good Credit Score?
The credit scores allocated by CIBIL usually fall within the range of 300 to 900, 300 being the worst and 900 the best. So, if you are aiming for a good credit score, you should be looking at figures between the range of about 550 and above. Your credit score can increase or decrease according to your credit history.
The Importance and Benefits of CIBIL Score
In India, the Reserve Bank of India has made it mandatory for all banks to check the CIBIL score of customers before onboarding them, making it an important part of your financial transactions. Let's look at some benefits of a good CIBIL score:
Quick Loan Approval
As explained before, a good CIBIL score assures lenders that you are a worthy candidate for a loan. But if you have a low score, they may ask for additional guarantors and collateral before considering you for a loan.
Better Negotiating Powers
If you know how to increase your CIBIL score, you can negotiate with your lender to grant you a loan at lower interest rates. In case your lender refuses to budge, a good score gives you the freedom to shop around for better deals.
Quick Approval for Rented Property
Even if you are only renting or leasing a property, the property owner would like to see evidence that you will pay your rent promptly. If you have a good CIBIL score, they will be more willing to let out their property to you.
Higher Levels of Credit
You may need to increase the credit limit of your credit card or maybe get a top-up loan. A good credit score acts as proof that you will be able to pay increased credit under the terms of the contract.
Higher Approval Limits
Similar to the way you can increase your credit limit, if you have a good CIBIL score, you are likely to get approval for upper-limit loans. This means that you can get the maximum amount for the loans that you apply for.
Additional Credit Card Offers
You will get better and more attractive offers from your credit card company if you have a good CIBIL score.
What Are the Reasons for a Low CIBIL Score?
Having a good CIBIL score is great and allows you to sail through all your financial dealings. But what should you do if your CIBIL score is low? And more importantly, why would this happen? Here are a few likely reasons for a low CIBIL score:
Defaulting on Your Payments
The main reason behind a low CIBIL score is failing to pay your equated monthly instalments (EMIs) on time. If you miss a due date, the fact gets recorded, thereby reducing your CIBIL score.
Closing Too Many Credit Cards
Maintaining a credit card can actually build up your credit score, as long as you pay your bills on time. Unless you are being charged a really high annual fee, try not to close even your oldest credit cards if you can keep them up-to-date.
Applying for Too Many Loans
If you apply for too many loans, you may come off as being desperate for cash. The issue becomes worse if you have several rejected loan applications.
Using Your Credit Card to Withdraw Cash
Here again, you give the impression that you are not able to manage your finances responsibly, and your CIBIL score may be impacted.
As we have outlined above, multiple factors can affect your CIBIL score. If you are aware of these factors, you can always take precautions to increase your credit score.
Tips to Improve Your CIBIL Score
Knowing how to improve your credit score is easy if you adopt good credit behaviour in all your financial dealings. Try these tips to improve your credit score:
1. Pay Your Dues in Time
Whether it’s for a home loan, a personal loan, or a credit card payment, the best practice is to pay on or before the due date. Late payments attract unnecessary interest and put you in a bad light.
2. Do Not Withdraw Cash With Your Credit Card
In dire need, you may be tempted to withdraw cash using your credit card. In this respect, a credit card is a double-edged sword. The cash you withdraw comes at an extremely high interest and makes you seem financially irresponsible, eventually lowering your CIBIL score.
3. Balance Your Credit Risk
The two types of loans that you can take are secured (like a house loan) and unsecured loans (like a personal loan). Maintaining an even balance of both these types of loans reflects responsible financial behaviour and increases your CIBIL score.
4. Fully Clear Your Monthly Credit Card Bill
Do not leave any balance payment on your monthly credit card bill. It’s a good idea to set up a standing order to clear the full amount pending on your credit card bill every month. It not only saves you from unwanted expenses in the way of interest and charges on your card; it also helps you improve your CIBIL score immediately.
5. Maintain a Low Credit Balance
Maxing out your credit card regularly shows that you are not financially responsible. It is always advisable to avoid using it to its full capacity, even if you feel confident of paying your bill in full. It increases your CIBIL score as well.
CIBIL Score FAQs
Q: How long is my CIBIL score valid?
The record remains with CIBIL for at least seven years from the date of the first report they receive.
Q: If I utilize my credit limits to the maximum, can it affect my CIBIL score?
Using credit sensibly includes not reaching or exceeding the limit that the credit card company extends to you. Keeping your credit at a lower level indicates that you are capable of maintaining a buffer credit amount for emergencies and can boost your CIBIL score.
Q: Is it better to have more secured or unsecured loans?
Having unsecured loans but not defaulting is a good thing. However, it is advisable to have secured loans as well. Secured loans are more difficult to get because you have to show collateral. If you can maintain both secure and unsecured loans, you will appear to CIBIL as a financially stable individual and improve your CIBIL score.
Q: Does CIBIL delete or change the financial records of individuals?
CIBIL will not make any amendments to the financial records of any person. They collect information provided by banks and financial institutions. There is also no list of “bad” or “good” credit holders held by CIBIL.
Q: What is an “NA” or “NH” credit score?
Sometimes, instead of a regular number, a person’s credit score will be designated as “NA” or “NH” by CIBIL. It means that the individual either has no credit history (as in very young account holders) or has insufficient credit exposure. A person can have insufficient credit if they have add-on credit cards only.
Although CIBIL does not consider the above designation negatively, some lenders take a dim view of it. You can resolve this problem by applying for a loan or credit card from another lender.
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