Whether you apply for a loan or try to get a new credit card, the first thing the bank will check is your credit score. Sometimes, even though you pay your EMIs regularly, and never default on your credit card bills, and yet, your credit score keeps on declining. So, in this article, we will understand which factors actually drive your credit score down and how to improve it practically. Even if you never took any credit, it is still important to understand and build a good credit score so that you can get loans easily in the future. So, let’s dive in.
What is Credit Score or CIBIL Score?
CIBIL score, also known as credit score, is a 3-digit numeric representation of your credit history. It ranges from 300-900 and represents the creditworthiness of an individual. CIBIL or Credit Information Bureau (India) Limited maintains the history of your credit profile such as loans, credit cards, payment history, etc., and calculates the score.
In summary, Credit Score denotes how well you have managed your credit profile in the past.
How is CIBIL Score Calculated?
CIBIL score is calculated based on various factors that indicate your creditworthiness and financial stability. The factors that are taken into account when calculating your CIBIL score include:
- Credit history: Your credit history plays a significant role in determining your CIBIL score. This includes your repayment history, credit utilization, and length of credit history.
- Credit mix: The type of credit you have, such as secured loans, unsecured loans, and credit cards, also impacts your CIBIL score.
- Credit inquiries: The number of inquiries made on your credit report, such as when you apply for a loan or credit card, can also impact your CIBIL score.
- Defaults and delinquencies: Any defaults or delinquencies, such as late payments, can negatively impact your CIBIL score.
- Other factors: Other factors that may impact your CIBIL score include your income, employment history, and the amount of credit you currently have.
It’s important to note that your CIBIL score is not fixed and can change over time based on your credit behavior.
What is a Good CIBIL Score?
CIBIL uses a complex algorithm to calculate your score, which ranges from 300 to 900. The higher your score, the better your creditworthiness and financial stability. A score of 750 or above is considered to be a good CIBIL score, while a score of 600 or below is considered to be a poor score.
- Excellent CIBIL Score: 750-900
- Good CIBIL Score: 650-750
- Average CIBIL Score: 550-650
- Poor CIBIL Score: 300-550
How to Check Your CIBIL Score?
- Visit the link: https://www.cibil.com/freecibilscore
- Click on “Get Your Free CIBIL Score”
- Fill up your details
- Click on “Accept and Continue”
- Verify your identity by entering the OTP received in your mobile and email id.
- You should get a message “You have successfully enrolled”.
- Click on “Go to dashboard”
- Your CIBIL score will be displayed.
Benefits of Having a Good Credit Score
Here are some of the benefits of having a good CIBIL score:
- Faster loan approvals: A good CIBIL score increases your chances of getting loan approvals quickly. Banks and financial institutions usually prefer to lend to individuals with a good credit score, as it indicates a lower risk of default.
- Better interest rates: With a good CIBIL score, you can negotiate better interest rates on loans, credit cards, and other financial products. Banks and financial institutions are more likely to offer lower interest rates to individuals with a good credit score, as they are considered to be less risky borrowers.
- Higher credit limits: A good CIBIL score can also help you get higher credit limits on credit cards and other credit facilities. With a higher credit limit, you can make bigger purchases and manage your finances more efficiently.
- Improved bargaining power: With a good CIBIL score, you have better bargaining power when negotiating with lenders and creditors. You can use your credit score to negotiate better terms and conditions, such as longer repayment periods or lower interest rates.
- Increased financial security: A good CIBIL score can give you a sense of financial security, as it indicates that you have a good track record of managing your finances responsibly. This can help you feel more confident in your financial decisions and reduce your financial stress.
You will also be eligible for Premium Credit Cards and Pre-approved Loans with a good Credit Score.
Clearing the Confusions around Declining Credit Score
- Checking your credit score frequently will not impact your credit score. Only when you enquire about different loans from multiple banks and so a lot of banks fetch your credit score from CIBIL, then only your credit score will get impacted. If you are checking your credit score yourself, it will not harm your credit score.
- Not fully using your credit card or not regularly using your credit card will not harm your credit score. So, even if you use your credit card very rarely, it will not impact your credit score.
- Increasing the limit on your credit card will not harm your credit score.
Steps to Improve your Credit Score
1. Maintain a disciplined repayment history
While calculating your credit score, CIBIL checks your repayment history. It will check whether you have paid your EMIs on time or paid your credit card bills on time. In case you defaulted on any of your loan EMIs, paid the EMI after the due date, or not paid the credit card bills in due time, it will reduce your credit score significantly.
Pro tips:
- Never default on your loan EMIs
- Pay your EMIs on or before the due date
- Track your credit card dues and pay them off before the due date
- For credit cards- pay the full due amount and not the minimum due amount
2. Keep your Credit Utilization under 30%
Suppose you have a credit card with a limit of Rs 1 lakh and you have used up 90 thousand from that credit card. In this case, your credit utilization is 90%. Even though you pay your 90 thousand bills before the due date, your credit score will go down. CIBIL will identify such high credit utilization as a sign of a ‘Credit Hungry’ person, and it will decline the Credit Score. So, it is important to maintain a safe credit utilization limit. Ideally, you should keep your credit utilization to 30% or below. So, from the previous example, if your credit card has a limit of 1 lakh, you should not spend beyond 30 thousand in a given month.
Pro tips:
- Never use more than 30% of your available credit card limit
- If you need to use more, ask your bank to increase the credit limit so that your utilization stays within 30%
- You can opt for 2 credit cards and keep utilization under 30% on each card
- If you have any ongoing loans, your monthly EMI + monthly credit card bill should be less than 40% of your monthly income.
3. Keep a healthy credit mix
Credit mix simply means what all types of loans you have. If you are having all kinds of loans like a home loan, vehicle loan, education loan, credit cards, appliance loan, etc. at the same time, it will impact your Credit Score. Usually, there are two types of loans-
- Secured loans: like home loans, vehicle loans, loans against your LIC policy, etc.
- Unsecured loans: like personal loans, credit cards, student loans, etc.
If you have more unsecured loans than secured loans, CIBIL will reduce your Credit Score. So you have to minimize your unsecured loans.
Pro tips:
- Your total unsecured loans should be less than 20% of your credit limit
- Credit limit = Monthly income/2. So, if your monthly income is INR 50,000 then your monthly credit limit is INR 25,000. So, your Unsecured loan’s EMI should be less than 20% of Rs 25,000 or Rs 5000. So, your monthly personal loan EMI + Credit Card bill should be < Rs 5000
- Don’t take multiple loans in a short period of time. Even if you need multiple loans, try to keep a gap of at least 6 months between two subsequent loans.
- Don’t use multiple credit cards. Use only 1 or 2 cards.
In summary, Having too many existing loans, an unhealthy credit mix and high EMI outgo will lead to a poor CIBIL score.
4. Don’t apply/enquire for multiple loans
Suppose you need a home loan, and you apply to 10 banks for the same loan. Now, all these banks will fetch your credit score from the CIBIL to verify your creditworthiness. As more banks report to CIBIL about your credit inquiry, CIBIL will identify you as someone who is hungry for credit and will reduce your credit score. It is not wrong to enquire about loans. But, when you generate frequent loan inquiries in a short time span, your credit score will decline.
5. Do not close your old credit cards
CIBIL loves when you have a long history of credit. If you have an old credit card that you have been using for a long time and paid your dues in time, then don’t throw it away. Such a good and long credit history can help you improve your credit score. If you have too many credit cards, close the new ones, and negotiate with your bank to get better offers on your old credit card itself.
6. Be careful in credit partnerships
- Joint loans: If you have a joint loan with another person, you become a co-borrower, who shares ownership of the loan and responsibility for repayment. So, even if the other person defaults in his repayment, your credit score will go down.
- Add-on credit card: If you have an add-on credit card with someone, if the other person defaults or delays his credit card bill payment, your credit score will get impacted.
- Loan guarantor: When you become a guarantor in somebody else’s loan, you agree to be responsible for the repayment of his/her debt. So, in case of default or delay in loan repayment from his/her side, it will decline your credit score.
- Partnership firm: If there is a partnership firm or company registered in your name and the company defaults on its loan, then also your credit score will get affected.
7. Raise disputes in case of inaccuracies
Sometimes there might be errors and inaccuracies by the banks or CIBIL itself. For example, you might have completed your loan repayment, but the bank has not provided that detail to CIBIL. In such a case, CIBIL will register no payment against your loan and will reduce your credit score.
So it is very important to review your credit score periodically. In case there is any inaccuracy in your report, you can raise a consumer dispute on the CIBIL website: https://www.cibil.com/consumer-dispute-resolution. CIBIL will cross-check the dispute with your bank and correct your credit score accordingly.
I hope you found this article helpful. Do let me know in the comments what you think. Your suggestions are welcome.
