Did you check your CIBIL report recently and were shocked to see a low score? Now perhaps you are wondering, How to Improve CIBIL Score? Well you are not alone in this boat. Many of us unknowingly build a bad credit rating over time. But you don’t have to worry because a credit score is not something that cannot be improved or increased. All you need is better financial discipline. In this article, we will share few tips on How to increase CIBIL Score. But before we get on with these tips, let us first understand what is CIBIL score and how it is calculated. In case, you want to check your CIBIL score, read How to check CIBIL score?
What is CIBIL Score?
CIBIL Transunion Score (Credit Score or Credit Rating) is a 3-digit number which indicates an individual’s financial & credit health. The score is derived from the individual’s credit history and ranges from 300 to 900 points. The credit score gives an indication to the lender about the likelihood of individual paying back loan or credit card dues based on his past repayment behavior.
The closer your score is to 900, the better are the chances of your loan getting approved. Anything above 750 is considered a good credit score. 80% of all loans are approved for individuals having a CIBIL score of more than 750. Therefore, we must try to increase our CIBIL score to more than 750 before we apply for a home loan or any other loan.
Now check out these tips on how to improve CIBIL score.
How to improve CIBIL Score?
1. On-time Credit Payments
Repayment history has the highest weightage (about 35%) in your CIBIL score. This is the biggest reason for a bad credit rating. Many people delay their credit card payments or sometimes pay only the minimum due. This is bad financial discipline. By doing this, you are not only paying high interest rates (upto 40% per annum) but also making a dent in your credit score. To maintain a good repayment history, you should pay all your loan EMIs and credit card dues on time. Even a single default has a negative impact.
Another mistake that people make is to either settle their defaults by making part payment or just run away from making payments. These people do not realize that the financial institution marks this as “settled” or “write off”. In both cases you will be blacklisted for at least 7 years from taking any credit.
- Pay your credit payments (credit cards & loan payments) on time all the time. A good habit is to opt for automatic ECS payment facility for all your loan and credit card payments. If you pay by cheque, then drop your cheque atleast 5 days before the payment due date as it will take some time to clear.
- You should never take so much debt which you cannot manage easily. And always pay off your liabilities in FULL. You should never default or settle your debt. As a thumb rule, your overall EMI should not be more than 35% of your monthly take home salary.
2. Credit Utilization
After repayment history, credit utilization (30% weightage) is the most important factor in determining your CIBIL Score. Credit utilization ratio is the ratio of total credit (liabilities) that you owe to your total credit limit. A very high credit utilization ratio is considered risky and has a negative impact on credit score. For example, if you have a credit limit of Rs. 1 lakh on your credit cards and you are spending more than Rs. 80,000 every month using your credit cards, it will have an adverse impact on your Credit rating. Similarly, if you have taken too many loans, your profile will be viewed as risky with high chances of payment default. A 30-40% credit utilization ratio is acceptable and anything beyond 50% will put you in caution zone.
- In order to improve your credit utilization, you can do two things. First, you can increase your credit limit. Second, you can reduce usage of credit cards and start paying for few things using debit card or cash.
- Do not surrender credit card as it will reduce your credit limit. Unused or lesser used credit cards also help improve your CIBIL score as it indicates that you are financially secure.
3. Duration of Credit Servicing
If you have been making timely payments for your loans/ credit cards for a longer period of time, it will increase your credit score. A person servicing credit for 5 years will score higher than another person who is using credit for just 1 year.
Tip: If you have never taken a loan or a credit card, you can start building your credit history by applying for a credit card. But remember to maintain financial discipline and never default on payments.
4. Credit Mix
Unsecured Credit – A high percentage of unsecured credit is bad for your credit health and hence CIBIL score. Unsecured credit means your credit card liabilities and personal loans which are totally unsecured and you can easily default on them. In your credit portfolio, if all you have is unsecured credit and no secured credit such as home loan, auto loan etc., it will have an adverse effect on your CIBIL score.
Tip: In case your unsecured loans form more than 80% of your credit portfolio, you can look at prepaying part loan to improve your CIBIL score. A better credit mix i.e. your credit (liabilities) spread across credit cards, auto loan, personal loan, home loan etc. will help in improving your credit score.
5. Number of Credit Inquiries
Whenever you apply for a loan or a credit card, the lender will run an inquiry on your CIBIL report. More number of inquiries indicate that you are credit hungry which is not a good sign for your credit health. Hence, higher number of credit inquiries have a negative bearing on your credit score.
- Don’t apply a home loan with 6 banks. Every bank will run an inquiry on your credit report. Instead, first check your CIBIL score and then apply for a home loan with maximum 2 banks.
- Keep a gap of atleast 6 months between 2 loans. Don’t apply for loans if you don’t need any.
6. Credit Activity
On one hand very high credit utilization is bad for your CIBIL score while on the other hand no credit activity is also bad. Regular and moderate credit activity improves your Credit Score.
Tip: Use credit cards and loans in moderation regularly but ensure that you make timely payments. And never overspend in the excitement of a sale and festive season.
7. Monitor Co-Signed & Joint Accounts
In co-signed or jointly held accounts, you are held equally liable for missed payments. This is extremely important because your joint holder’s negligence could affect your ability to access credit when you need it.
Just because a friend has helped you in the past, you should not blindly return the favor by becoming a guarantor on his loan. Most people do not understand the liability that comes with becoming a guarantor. In case, your friend defaults and if you have signed the application as a guarantor, your CIBIL score will also go down. Similarly, if you have co-signed a home loan with your brother, both of you will be held equally liable.
Tip: Do not co-sign a loan application unless you completely trust the other person and you are sure of his financial soundness.
8. Review Credit History Regularly
Review your credit history frequently. Sometimes, your CIBIL score may be less not because of your fault but because of faulty reporting by your lender. Unpleasant surprises in the form of rejected loan applications can be avoided by ensuring that your Credit Report accurately reflects your current financial status.
Tip: Always check your CIBIL Score before applying for any loan. You can save thousands of rupees of loan processing fee. As a best practice, you should check CIBIL Score at least once in an year.
Remember it hardly takes any time to mess up your CIBIL score while it takes a much longer time to bring it back to above 750 level. Now that you know how to improve CIBIL Score, we hope that you will bring better financial discipline in your life.
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