How is CIBIL Score Affected?

If you have ever applied for a loan, you must know that when you request a loan or a credit card, a lender will examine your credit score first. The key to having your loan request accepted swiftly is having a decent credit score. A variety of things are considered before determining your credit score and there are many

factors affecting CIBIL score

. But before I begin to tell you about that, let me help you understand what a CIBIL score is. A CIBIL score is a number-based indicator of your credit-repayment capacity. It's a three-digit figure that lies between 300 and 900. You might receive higher rates on credit cards and loans if your score is around 900. A CIBIL score of 750 or more is preferred by the majority of lenders, including banks and non-banking finance firms (NBFCs).

How is CIBIL score affected?

A CIBIL score is made up of four main factors:

Let’s take a look at some of the major factors to understand

how CIBIL score is affected

: 

• Irresponsible Payment Behaviour: The primary factor affecting your score is your payment history. It's crucial to make on-time monthly payments for your loan EMIs and credit card obligations. According to a CIBIL study, a 30-day delinquent can lower your rating by 100 points. It is advisable to set up alerts and notifications if you have several credit cards and loans so that you don't miss or delay payments. Any late or missed payments have a negative impact on your rating and give the impression that you are inconsistent in repaying credit.

• High Credit Utilisation Ratio: You should monitor your credit usage ratio as one of your guiding principles. It refers to the number of funds used in relation to your available credit limit. Experts advise against utilising more than 30% of your credit card limit in any given month. If your credit card has a limit of Rs. 1 lakh, for instance, you should spend about Rs. 30,000. Your credit score may be negatively impacted if you have utilised more than 50% of your available credit. Lenders will be alerted if you have a high credit vulnerability because it shows you are more likely to default.

• Outstanding Debt: You should constantly make an effort to pay off any unpaid bills. Your credit score suffers when outstanding debts are listed on your credit record. Even if the balance is only a modest amount, it is advisable to settle past-due debts.

• Paying only the Minimum Amount Due: A little part of the principle that is payable each month is the minimum amount due. If you consistently spend just the fixed level owing, you risk falling into a debt trap. The interest on your remaining balance will compound if you roll over the loan by making only the minimum payment. So, it is recommended that you pay off all of your credit card debt. Additionally, it exhibits sluggish repayment habits.

• Making Multiple Credit Applications: Lenders will obtain your credit record in order to determine your creditworthiness when you request a loan or credit card. It's referred to as a hard inquiry. Numerous credit inquiries will take place at the same time if you submit multiple applications. These challenging questions are publicised and harm your score. You'll come off as credit-hungry.

• Errors in your CIBIL Report: Your current and previous credit accounts are fully documented in your CIBIL report. Your score may suffer if your report contains any mistakes. Therefore, you must have any errors in your report corrected.

• Not Having a Credit Mix: A healthy ratio of secure and unsecured loans must be kept in place. Instances of secured loans include mortgages and vehicle loans, whereas an illustration of an unsecured loan is a credit card. Your credit score may be impacted if you have a lot of one particular sort of credit. Additionally, having a balanced mix of various loan forms indicates that you have managerial experience in both sorts of loans. Lenders find this to be desirable.

• Length of the Credit History: Credit history, put simply, is the total amount of time since you initially started a credit account. A lengthy credit history aids creditors in making an informed choice when extending loans to you. It is best to concentrate on establishing a credit history early in life so that you have a solid credit history by the day you qualify for a home loan or auto loan. 

• Closing old Credit Card Accounts: A good way to establish a credit history is with credit cards. But when you close an old account, you lose the lengthy credit history that was attached to it. Keeping the card open for as long as feasible, if possible, is advised if you have been using it for a significant amount of time. A very new card might be closed.

These can be said to be some of the major

factors affecting CIBIL score.