Loans have made our lives easier and simpler. From home loans to car loans to business loans, many types of loans are available in the market to cater to your different needs. You can avail of these loans to get access to finances and repay them in Equated Monthly Instalments (EMIs) as per your loan tenure.
However, in order to qualify for a loan, you need to have a good CIBIL score or credit score. Your credit score is the numerical representation of your creditworthiness. The TransUnion CIBIL credit bureau calculates the credit score in India based on certain parameters, such as an individual's credit history, past payments, active credit accounts, credit utilisation ratio, etc.
This article will learn about the factors that determine your CIBIL score, the relationship between your CIBIL score and the interest rate for loans, and how to increase your CIBIL score. Let's get started.
Factors that influence your CIBIL score
Let's read in detail about the factors that influence your CIBIL score:
- Your credit repayment history : Your CIBIL score is basically the reflection of how promptly you have repaid your debts in the past. That is why your credit repayment history is the biggest factor that influences your CIBIL score. A history of timely repayments can significantly boost your credit score, whereas any default on credit card bills or loan EMIs can impact it negatively.
- Your active loan accounts : The number of loan or credit card accounts currently active in your name can also increase or decrease your CIBIL score. If you have too many active loan accounts, it means that you are already paying multiple EMIs from your monthly income, and hence, your credit score may become low. On the other hand, a fewer number of loan accounts can uplift your credit score.
- Your credit utilisation ratio : Your current credit utilisation ratio also plays a significant role in determining your CIBIL score. The credit utilisation ratio is the ratio of the credit used by you to the total available credit limit. A high credit utilisation ratio may negatively impact your credit score, indicating that you have a high chance of defaulting.
- Your credit mix : Your credit mix, or the diversity of your credit accounts, is another factor that impacts your CIBIL score. If you have multiple credit accounts, such as credit cards, home loans, car loans, and personal loans, you are perceived as a responsible borrower who can handle various credit accounts. Therefore, it can increase your credit score.
- Length of your credit history : The amount and the length of your credit history are taken into consideration while calculating your CIBIL score. If you're a new borrower with little or no credit history, your CIBIL score is likely to be on the lower side. However, if you have a long and positive credit history, your CIBIL score is expected to get a boost.
- Number of credit enquiries : When you apply for a new credit card or loan, your lender checks your creditworthiness by pulling a credit enquiry about you from the CIBIL bureau. Too many credit enquiries can negatively impact your CIBIL score. Hence, if you make frequent applications for credit cards or loans, your CIBIL score may come down.
Why is it essential to have a good CIBIL score?
Having a good CIBIL score is very crucial for the following reasons:
- Your CIBIL score determines your eligibility for availing of a loan from a lending institution. Whenever you apply for a new credit card or loan with a lender, it checks your creditworthiness by looking at your CIBIL score. If you don't have a satisfactory CIBIL score, the lender may disapprove of your application.
- Another reason why you should improve CIBIL score is that it allows you to get better deals on your credit accounts. For example, you can get higher limits on your credit cards and secure lower interest rates on loans.
- Not only the lenders but the landlords also use CIBIL scores to check the creditworthiness of their prospective tenants. Hence, having a good credit score makes it easier for you if you're looking for an apartment for rent.
- A good CIBIL score also allows you to get better deals on your car and home insurance premiums. Though insurance companies do not rely solemnly on your credit score to calculate your premiums, it certainly plays a part in it. And if you don't have a satisfactory CIBIL score, they can ask for increased premiums.
The relation between CIBIL score and the rate of interest
As mentioned above, having a high CIBIL score can help you fetch lower interest rates on loans. There are several lenders that offer loans with varying interest rates as per the borrower's credit score. Usually, if you have a CIBIL score of 750 or higher, you may get loans at affordable interest rates from the lending institutions. On the other hand, if you have a low CIBIL score, you may be charged with high interest rates for availing of a loan.
This is because a high credit score denotes that the borrower is creditworthy, and it would be safer for the lenders to lend them a loan. And when the lenders feel sure that they will get their money back from the borrower, they do not charge high interest rates. Therefore, it's very crucial to monitor your CIBIL score from time to time and take steps to improve it.
How to improve your CIBIL score?
By now, you must have understood the importance of having a good CIBIL score and how it can help you fetch lower interest rates on various types of loans. Now, let's learn about how to improve CIBIL score immediately with a few simple steps:
- Pay your dues on time
The most significant factor that determines your CIBIL score is your credit repayment history. Hence, paying all your dues on time, including your credit card bills and loan EMIs, can provide a major boost to your CIBIL score. On the other hand, late or delayed payments of your dues can hamper your credit score to a large extent.
- Keep your credit utilisation ratio low
As you know that your credit utilisation ratio has a significant impact on your CIBIL score, it's better to keep it as low as possible. It means that you should use your credit card wisely and avoid unnecessary spending. Also, you should borrow a loan only if it is required.
As per the CIBIL experts, you should try to maintain a credit utilisation ratio of below 30 percent. It will reflect that you are a person who does not wish to spend too much and instead believes in maximising your savings. In turn, this will improve your CIBIL score.
- Avoid making multiple loan applications within a short period
Thanks to digitalisation, availing of loans is a hassle-free affair these days. Whether you want to purchase a car, home, electronic item or address any major financial goal, loans are readily available for you. While there's nothing wrong with availing them, it's important not to make multiple loan applications within a short period.
When you make multiple loan applications simultaneously, the lenders perceive you as a credit-hungry borrower, which can bring down your credit score. What you can do is opt for a flexible loan limit that allows you to make withdrawals as and when required without making multiple applications.
- Don't apply for a loan unless you need it
Every time you apply for a new loan, the lender conducts a hard enquiry on your CIBIL score to check your creditworthiness. This hard enquiry temporarily lowers your credit score. Additionally, if the lender rejects your loan application, it can cause prolonged damage to your CIBIL score.
Therefore, you should avoid applying for a fresh loan unless you need it. Also, you should first check your loan eligibility with a lender before applying for a loan with it, making sure that your loan application won't get rejected.
- Maintain a good credit mix
The diversity in your credit accounts reflects that you are a responsible borrower who can handle multiple types of credits. By maintaining a good balance of various kinds of secured and unsecured loans, you can significantly improve your CIBIL score.
Therefore, you should try to take multiple loans per your requirements and repay them responsibly. For example, you can borrow one or two unsecured loans, such as personal loans and credit card loans, as well as a few secured loans, such as a car loan or a home loan.
- Try to keep your oldest credit account active
The length or age of your credit history also impacts your CIBIL score. Long credit history can help you improve your credit score whereas, new borrowers are perceived as a risky proposition by the lenders. Therefore, if you have some active credit accounts, such as an old credit card, try not to close them.
When you close your credit accounts, your credit age is shortened, hampering your current CIBIL score. Additionally, the number of your active credit accounts also decreases, which in turn lowers your CIBIL score.
- Report errors in your CIBIL reports (if any)
Sometimes, your CIBIL score may suddenly decrease without any fault of yours. It can happen due to some errors or discrepancies that might have crept into your credit reports. For example, any inaccurate information of late payment of credit card bills by you can bring your credit score down by 60 to 100 points.
Hence, you should review your CIBIL reports from time to time and carefully look for the errors. If you notice any disparity in it, inform the CIBIL bureau immediately and get them rectified.
The Final Words
A healthy CIBIL score can benefit you in multiple ways. It not only increases your chances of getting a loan from the lending institutions but also helps you get the best deals and lowest interest rates on those loans. Therefore, it's very crucial to understand how to improve credit score and act accordingly.
Ideally, your CIBIL score should be at least 750 or above. In case it goes below 600, you should take immediate action to improve it. Pay off all your pending debts and ensure that there are no unpaid dues in your name. A clean credit report without any history of default or late payments can work wonders for your CIBIL score.
Once you have taken these measures, you can apply for a loan and enjoy the best interest rates on them. At Poonawalla Fincorp, we provide loans at competitive interest rates for all your financial requirements, such as Personal Loan, Professional Loan, Business Loan, Home Loan, and many more. You can apply for a loan of your choice and secure the best deal with us.