The Indian economy has undergone a significant transformation in the past couple of years which has driven customers to demand more credit instruments. Approximately 22 million Indians apply for credit instruments each month. While credit instruments have infused a wave of convenience in our daily lives, maintaining a good credit score is paramount to ensuring that you can avail the loan amount of your choice at better rates of interest. Credit scores are generated by organisations called credit bureaus. There are 6 major bureaus in India, of which Transunion CIBIL which provides the CIBIL score is the most famous.
Like credit scores provided by other organisations, CIBIL score is a number that ranges between 300 to 900 and is used by lenders to assess an applicant’s creditworthiness when they apply for a loan. A CIBIL score of minimum 750 is considered to be excellent and can help you in availing credit easily.
Here are some factors that can impact your credit score:
Your credit score is, to a large extent, a reflection of how promptly your debts have been repaid in the past. Any default in credit card or loan payments will reflect negatively on your credit score. The longer your credit bills remain unpaid and the greater the frequency of unpaid bills, the harsher the impact on your credit score.
Repayment history accounts for approximately 30% of your credit score.
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Consistently displaying the inability to reorganize your spending habits as per your means can be detrimental to your credit score. Increase in credit utilization beyond a certain limit creates a negative effect since it is perceived as irresponsible financial behaviour.
The credit utilization amount is calculated by dividing the amount payable with the credit limit. Your credit utilization limit accounts for approximately 25% of your credit score.
On applying for any new form of credit, lenders run a check known as a hard check through your credit report. The hard check is performed to assess your repayment potential and can play the determining factor in whether your loan is sanctioned or not. Applying for credit with multiple institutions portrays you as a credit hungry person. The primary concern of every lender is to obtain the funds lent back on time and hence aggressively applying for credit creates to multiple lenders creates an impression that you might have trouble in servicing your loan instalment in the future.
Your credit score is impacted by approximately 20% on making multiple inquiries to multiple lenders.
Banks maintain a detailed report of your credit history. Potential lenders can avail a detailed report of your credit behaviour right from the first time you have availed of credit. A long and positive credit history impacts your credit score positively and can help in availing credit history easily. Lending institutions lay weightage to a positive and consistent repayment history over time and hence it might be a good idea to retain your old credit cards even if you do not require to use them any longer. Closing old credit cards may lead to a drop in your credit score.
Must Read: How is Your CIBIL Score Calculated?
An ideal credit mix is a blend of secured as well as unsecured loans. Loans that require the lender to pledge an asset to avail a loan is known as a secured loan. These loans include home loans, car loans etc. Unsecured loans are not secured by any collateral and are hence known as ‘unsecured’. Borrowing and honouring different types of credit builds trust in the lender and in turn impacts your score positively.
Avail a copy of your credit report at least once a year and ensure that it is error-free. Work towards building and retaining a healthy credit score to ensure you can negotiate credit at better rates in the future.