Do you wonder why some individuals grab lucrative deals on loans and others get a cold shoulder? It all lies in the integral component of loan applications: your CIBIL score. Whether you perform the CIBIL score check through a PAN card or any other platform, it is imperative to understand your score before you apply for a personal loan.
You can think of the CIBIL score as the creditworthiness report card. Lenders use your CIBIL or credit score to understand how likely you are to pay back the loan amount. A good score implies improved interest rates on the loan, easier credit card approvals, and even better deals on insurance.
What exactly determines this score? Several factors are considered while determining the CIBIL score. Let us understand them in detail.
What is a CIBIL Score?
The CIBIL score essentially helps lenders determine whether or not you should be given a loan approval. The CIBIL score depends on several factors, including the loan payment history, your previous credit behavior, the nature of existing loans, and the debt-to-income ratio.
Here are some factors determining your CIBIL score:
1. Payment History
Payment history is one of the most important factors in determining credit scores. When you possess an impressive payment history, it suggests that you are a responsible borrower. In this case, the lender is assured that you are a creditworthy borrower. Therefore, the lender might offer better interest rates and lucrative loan terms. As such, you should make sure that you do not default on your loan payments.
It is recommended to maintain a record of all your monthly payments to ensure that they are made on time. Whenever a payment default occurs, even if it might be a genuine omission, it will hurt your CIBIL score. To make sure that you make monthly payments on time, you can leverage resources like standing orders, auto-debits, or NEFT mandates. While making a cheque payment, ensure that you send the same beforehand to get an allowance for the clearance period.
2. Credit Mix
Credit mix refers to the diversity of your credit accounts. This serves to be a common variable when it comes to calculating your credit score. When you possess multiple credit accounts, like a personal loan, a home loan, and a car loan, it reveals to the lenders that you are capable of managing different types of debts simultaneously. It also helps them get a better understanding of your current financial situation and the overall willingness to pay off the debt.
When you have a less diverse credit portfolio, it does not necessarily lower your CIBIL score. Still, the more credit mixes you have, the better. The only catch is to pay off all your debts on time. Credit mix makes up around 10 percent of your credit score while playing a major role in improving your overall score.
3. Length of the Credit History
The CIBIL score is available to new borrowers as well. However, you are expected to possess some credit for some time to ensure a healthy credit score in the long run. The oldest credit account you possess has a major impact on your overall credit score.
When you showcase a long credit history, the creditors are assured that you are able to manage your debts effectively. Therefore, this factor has a positive impact on your credit score. When you close down your old credit accounts, your credit score might decrease. Therefore, it is recommended to maintain the old credit cards with minimum transactions to ensure that you have a healthy credit score.
4. Credit Utilization Ratio
The credit utilization ratio is defined as the amount of credit you leverage from the total credit limit you have gathered together. According to financial experts, you should maintain a credit utilization rate of 30 percent to maintain a decent credit score.
When you have a credit utilization rate of more than 50 percent, it will not excite the lenders. A higher credit exposure implies more credit risk for the lenders.
5. Multiple Inquiries on the Credit
When your CIBIL score report reveals multiple in-depth inquiries on your previous credit history, it will harm your overall score. Multiple in-depth inquiries imply that you are desperate for credit. This puts you at immense risk. With increased credit, you will experience an increase in the credit burden. Eventually, the credit score will go down.
6. Debt-to-income Ratio
This factor is effectively considered by lenders or financial institutions before giving approval for your loan or credit applications. The debt-to-income ratio signifies the level of open credit accounts you possess. A higher ratio will indicate that you are overburdened by EMIs. Therefore, it is advised that you should keep your overall spending in check, with this factor lying in the range of 25 percent and 35 percent.
7. Outstanding Debt
This factor also negatively impacts your CIBIL score. Ensure that you clear off all your outstanding debts. When you possess records of unpaid debts, it could influence your overall score negatively to a greater extent. Ensure that you make both big and small payments as soon as possible.
Conclusion
Improving your CIBIL score takes time and consistent effort. By understanding the key factors that influence it and implementing strategies like paying bills on time, keeping credit utilization low, and maintaining a diverse credit mix, you can gradually build a strong credit history.
Regularly monitoring your credit report and disputing any inaccuracies can also help. Remember, a good CIBIL score opens doors to better financial opportunities, so make it a priority to manage your credit responsibly.
