Factors that determine your CIBIL score and how to improve it

The Credit Score is a number that is issued to an individual/company to determine their creditworthiness. This is calculated to help banks decide whether borrowers are able to repay the money on time. This post on the credit score is intended for newbies. Factors that decide the measurement of the CIBIL score are clarified with ways to improve it.

Credit scores are often used to calculate the amount of money/principal they can lend, how much interest rate they can charge, the term period of the loan, the repayment schedule, etc. So it is good to keep your credit score up to borrow at a low-interest rate on the market.

credit report

There are different credit bureaus that measure credit scores and offer credit scores to banks and other financial institutions. Each nation has various credit bureaus. For example:-

  • FICO score is used in the US
  • CIBIL score is used in India

There are also other authorized SEBI bureaus such as CRISIL, ICRA, and Equifax, which measure credit scores. Indian banks, however, often use the CIBIL ratings.

Does this mean that CIBIL determines whether you get a loan or not? No, the lender or bank determines whether to lend you money or not, CIBIL essentially gathers information from banks and other financial institutions and measures your score.

credit score

CIBIL Score is a three-digit number ranging from 300 to 900. The higher your score to 900, the higher the chances of your loan being approved. In other words, your chances of getting defaulted are high when your score is lower than 300. It is important to note that more than 90% of the loans sanctioned are for individuals with a ranking of more than 750. In order to improve the credit score and borrow at the cheapest interest rate, it is very important to consider the factors involved in the calculation of the score.

Factors involved in CIBIL score and how to improve

Your history of repayment is the biggest consideration. Having late payments on your credit card dues or not paying your EMI on time will adversely affect your score. Many banks consider loans to be non-performing assets (NPAs) if you fail to repay for more than 90 days. As this will cost more to banks, they’re not going to lend to you if you have a bad history of repayment. So please remember to pay your dues on time to increase your score.

The next factor is the high credit utilization. Using most of the maximum limit on the credit card or borrowing high-value loans compared to your salary will adversely affect your credit score. If you have a credit card limit of Rs . 2 lakh and say that you use up to the maximum limit for each billing cycle, this may affect your credit score.

credit score

It is also necessary to have a balanced mix between secured loans (such as home loans, auto loans) and unsecured loans (personal loans or credit cards). In a short period of time, borrowing multiple personal loans that are not secured will also affect your score. Therefore, the credit mix and period are more important to improve the credit score. Let us see one more factor which is important for obtaining loan sanctioned even though it is not directly linked to the credit score.

EMI to Income Ratio – This ratio is very important for lenders to decide on the amount of the loan, the duration, and the EMIs. Banks believe that you will require at least 40-50 percent of your NTH (Net take-home salary) for living expenses after you have paid all the EMI. So make sure that your EMI & Dues are not more than 40-50 percent of your income. It would also allow you to have financial discipline without having more debts.

How to check CIBIL score?

CIBIL score can be checked from their site cibil.com for free once a year.

Whether checking your CIBIL Report repeatedly will it affect the Credit Score?
credit score report

When we check our own credit score, it’s known as “soft enquiry” and it won’t affect the credit score. Checking our scores once a year would allow us to understand our creditworthiness.

However, when we apply for a loan from the bank, the lender will check your credit score from CIBIL, known as “hard inquiry.” Many hard inquiries in a limited period would certainly affect your ranking. And it’s really necessary to make sure we don’t apply for a loan from different banks.

I need a personal loan, but my CIBIL score is too low, I have unpaid dues for my educational loan, the Bank has denied my application. If I pay all the pending dues and close the educational loan, will my credit score improve immediately?

Even if you pay all of your unpaid dues tomorrow, it will take 45-60 days to for credit bureaus to update your credit score.

cibil score
How to improve your credit score?
  • Pay your dues or EMI on time.
  • Maintain a balance between secured and unsecured loans.
  • Do not use your credit card to its maximum limit.
  • Do not enquire about loans from multiple banks.
  • Do not borrow multiple loans in a short duration of time.
  • Always avail longer tenure for repayments and try to pay the part payments on time.

You need to be credit-disciplined in such a way as to increase your credit score and get credits accepted at the best interest rate on the market.

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