Almost all of us would have applied for personal loans or credit cards. Many of us might have faced rejection by banks stating that our CIBIL score is not good enough. What is a CIBIL score and how does it affect us? Let us explore this aspect in detail.
What is a CIBIL Score?
CIBIL Score is a number between 300 and 900. All banks and financial institutions are members of CIBIL. It is mandatory on their part to update the financial track record/performance of their borrowers with CIBIL with regards to their loans and cards. Based on this information, CIBIL works out the ratings of the individual borrowers (by performance and evaluation, you get the CIBIL score). The higher the rating, the better are the chances of getting loans.
How do you maintain your CIBIL score?
Now that you know the components of your CIBIL score, it should not be difficult to understand how to maintain it.
- Maintain optimum balance in your loan accounts, especially the running loan accounts like credit cards and overdraft accounts. The ratio of outstanding balance to the total credit should preferably not exceed 30%.
- Repay your loan installments on time without any default.
- Have both secured and unsecured loans in your loan portfolio.
- It is good to keep an old credit card alive as it elongates your credit history.
- Refrain from applying for loans frequently.
What are the benefits of maintaining a good CIBIL Score?
It makes you eligible for personal loans and credit cards.
Banks offer interest rate concessions to borrowers with good CIBIL scores.
- It becomes easy for you to get all types of loans.
Read More: How to Score well in your Credit Report?
What are the components that decide your CIBIL Score?
Credit Card Utilisation – You have a specific limit on your credit card. Your CIBIL score depends on how you use your credit card. The outstanding balance on your credit card plays a vital role in determining your CIBIL score. The optimum proportion should be in the range of 30% to 35% of your overall limit. A high balance indicates that you are over-dependent on your credit card. Hence, it affects your credit score. Secondly, you should pay your entire credit card bills on time. The tendency to pay the minimum amount that’s due on the credit card affects your credit rating.
- Age of Credit History – The age of your credit history is a crucial factor in deciding your credit rating. The older the history, the better it is for you. Therefore, it makes sense to keep your old credit card accounts alive. Use them wisely and renew the limits on time. It helps to improve the age of your credit history, thereby enhancing your credit rating.
- Total Accounts – The CIBIL report contains the details of all your loan accounts. The more the number of outstanding loan accounts, the lower will be your rating. It is essential to keep the loan accounts in order, but it is vital to restrict the number of accounts. Consider closing the loan accounts that you do not operate.
- Regular repayment of loans – If you repay your loan installments and credit card bills regularly without any default, your CIBIL score will improve.
- Loan Portfolio balancing – Banks offer secured as well as unsecured loans. Unsecured loans are those where the bank does not have any security to fall back on in case of default. Therefore, there is a high-risk perception. Banks pay greater attention to the unsecured loan portfolio and attach greater significance to the repayment of unsecured loans as compared to the secured loans. It implies that you should have a balanced loan portfolio comprising of both secured and unsecured loans to maintain a good CIBIL score.
- Loan applications and inquiries – Whenever you apply for a loan, the bank enquires about your credit history from CIBIL. Every such inquiry reduces your credit score.
We have observed the importance of maintaining a good CIBIL score and its varied aspects. You should use this information and try to maintain a good CIBIL score so that you become eligible for various loan facilities from banks and financial institutions.