Have you ever wondered why your CIBIL score isn’t what you want it to be? Or why is it so important to keep it in check? Your CIBIL score has a significant impact on your financial health, particularly when asking for loans or credit. In India, a strong CIBIL score can lead to lower interest rates and more favourable loan terms. So, what determines your CIBIL score? Let’s look at the important variables.
20 factors impacting your CIBIL Score
Payment history
Regular payments on loans and credit cards are important. Late or missed payments are detrimental to your score. Make sure that you always meet your EMI and credit card bills on time. It is also advisable to set up payment reminders or automatic debits to avoid missing the due dates.
Credit utilisation ratio
This has the effect of reducing your score if you utilise a large portion of your available credit limit. Ideally, you should try to use less than 30% of your credit limit. For instance, if you have a credit card with a credit limit of ₹ 1 lakh, it is advisable not to have balances more than ₹ 30,000.
Length of credit history
The longer the credit history, the better. It demonstrates your capacity to handle credit in the long run. If you have had a credit card for several years, it shows that you are creditworthy. It is also important to note that maintaining your oldest accounts active could have a good effect on your credit score.
Types of credit
Different forms of credit including home loans, car loans and credit cards are beneficial for your score. If you have diversified credit, it means that you can manage different kinds of credit appropriately.
Number of hard inquiries
Any time you apply for credit, a hard inquiry will be made on your report. Excessive credit inquiries can also bring your score down. Limit the number of times you apply for new credit.
Credit age
Paying off your accounts also has a negative effect because it decreases the average length of your credit history. But even if you are not using the old credit card, the best thing to do is to keep it open.
Debt to income ratio
Having high debt in your income is also bad for your score. Creditors consider a high D/I ratio as an indication that you might fail to service new credit facilities.
Credit card balances
Having high balances on your credit cards will reduce your score. Try to avoid having balances that are more than 30% of your credit limit or better still, try to pay your balances in full every month.
Number of accounts
Having less than two or more than four credit accounts can impact your score. A moderate number of accounts, if properly managed, are evidence of good credit history.
Recent credit behaviour
Recent activity, such as opening several new accounts, can also have a detrimental impact on it. The creation of multiple new accounts may also alert lenders to potential financial problems.
Credit limit
Using your credit limit to the fullest every time can bring your score down. It is better to keep credit usage as low as possible, do not use the full credit limit granted to you.
Settled accounts
It reduces your credit score if you have settled a loan for an amount less than what was due. Paying only the interest shows the lenders that you might have had difficulty in repaying your full dues.
Defaults
Failing to pay back loans or credit card balances significantly lowers your score. It is one of the most damaging indicators that you have not been able to honour your repayment obligations.
Loan tenure
It is better to have short loan tenures as these can improve your score as compared to long tenures. This is because shorter tenures suggest quicker repayment, a factor that is viewed positively by lenders.
Employment status
It is also important to note that constant job switching or being unemployed will also lower your score. Employment stability is an indication of reliability and the capacity to make regular payments on debts.
Address changes
Frequent address changes can impact your score, as it might indicate instability. Lenders prefer stability, as it suggests a lower risk of default.
Incorrect information
If there are mistakes in your credit report, then your score will be affected. Periodically review and edit for errors. Perform a CIBIL score check periodically to ensure your report is accurate.
Linked accounts
A joint account or a co-signed loan will also reflect on your credit report in case the other party fails to meet their obligations. Make sure that the other borrowers or joint account holders are also paying their bills responsibly.
Utility payments
Even though some of the utilities are not recorded, if they are overdue and handed over to collection agencies, they will affect your score. It is also important to pay all your bills on time to ensure that your credit score is good.
Public records
The credit score can be significantly affected by bankruptcies, liens and judgments. These records show a lot of financial problems and can be reported for several years.
Ending note
CIBIL score is an important factor that defines your financial status and your capacity to get loans and better interest rates. It is possible to maintain a good credit score by paying close attention to factors that influence your score including payment history, credit utilisation, and credit mix. It is also important to check the CIBIL score and rectify any errors and this way one is always aware of their financial status. Just always bear in mind that a good CIBIL score means better financial prospects and less stress.
Regularly checking your CIBIL score and undergoing the term plan compare process can help you make informed financial decisions. Keeping a careful watch on the things that influence your score and taking proactive actions will help you maintain a good financial situation.
