cibil credit score

How credit score work in India

Business Finance

A person’s credit score is commonly expressed as a three-digit figure ranging from 300 to 900 (with 900 being the highest attainable score) and is based on their repayment history, credit files, loan history, and other factors.

When you apply for a loan, banks and other lending organisations will examine this number to establish your credit risk. This factor determines whether or not you will be authorised for a loan by determining the likelihood that you will pay your expenses on time.

Your CIBIL score has an impact on the loan amounts that may be granted, as well as the interest rate. Your loan application may be rejected if your credit score is really low.

How is the CIBIL Score determined?

The CIBIL Score is produced using a function that is solely based on a person’s loan and credit card repayment history and related records. These six factors mentioned below affect your CIBIL scores in an enhanced way and these should be strictly avoided- 

Credit Combination

You should maintain a considerable balance of secured ( such as home loans, car loans) and unsecured credit ( such as personal loans, line of credit). It has the capability to grow your CIBIL score.

Ratio of Debt to Income

To increase your credit score, keep your debts, such as credit card payments and mortgages, below 50% of your income. Your credit score will have a considerable impact if you have a greater ratio in your credit report.

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History of Payments

Make sure you don’t forget to timely pay your EMI payments. Late payments and defaults can have a negative impact on your CIBIL score.

Negative impact on your CIBIL score

Foreclosure, insolvency, or an account in collection due to missing payments all affect your CIBIL score right away. This shows your potential lender that you are unable to manage your finances, making it more difficult for them to recover their money.

The usage of credit cards is common.

A huge credit card debt signifies a high repayment obligation, which can decrease your CIBIL Score.

 

Several Inquiries

Lenders may scrutinise your credit profile with care if you have lately applied for or been authorised for many loans and credit cards, as multiple credit applications represent your debt burden.

Maintaining a strong credit history, which is required for loan acceptance by lenders, might help you boost your CIBIL Score. Follow these six steps to help you improve your score:

Always make on-time payments: 

Late payments are frowned upon by lenders. Maintain a low balance. Always be cautious not to overextend yourself with credit, and keep your credit utilization under control.

Maintain a healthy credit mix: 

A good mix of secured (home loan, auto loan) and unsecured loans is preferable such as personal loan, best credit cards. A large quantity of unsecured loans may be seen negatively.

Keep track of your co-signed, guaranteed, and joint accounts on a monthly basis: In co-signed, guaranteed, or jointly held accounts, missed payments are held equally accountable. Your joint holder’s (or guaranteed individual’s) irresponsibility may jeopardise your ability to acquire credit when you need it.

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Examine your credit report on a regular basis throughout the year: 

Monitor your CIBIL Score and Report on a frequent basis to avoid unpleasant surprises such as a loan application rejection.

The Bottom line

When it comes to taking out loans, CIBIL scores are extremely important. When you take out a mortgage, the lender will first pull your credit report in order to assess your credibility.

If your CIBIL scores are greater, you have a good chance of securing a loan. You can also argue for better loan terms and lower fees and charges.

If your CIBIL score is low, though, your prospects of having a loan approved are slim. If you meet other loan eligibility criteria, however, the lender may be willing to offer you the money you need.

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