04 Oct 2019 | 7 min read
CIBIL score is one of the most important factors that lenders use to determine your eligibility for a personal loan, home loan, car loan, credit card, and other installment credits. It helps a lender to decide if you qualify for a loan or a credit card. Good credit score means you qualify for an easy loan at the most favorable terms, while your options begin to wear thin when you have a low or bad credit score. Credit score has a significant impact on your financial health.
This Dussehra know about 10 things that can make or break your credit score
1. Don’t miss or delay any payments
Your payment history plays a crucial role in building your credit score. Repaying your loans or credit card bills on time can improve your credit meteorically. No other measures can work unless you are making regular payments. Even delaying a single payment can hurt your credit score while skipping an EMI will damage your credit score severely.
If your credit score is suffering because you don’t pay your bills on time, you should clear your payments immediately. If you miss a payment for a longer time, request your creditor to revoke the reported delinquency so that it is not reflected in the credit report. Remember your credit score is largely made of your credit history, so you will not be able to create a significant impact on your credit score unless you make a payment on time. On the other hand, making timely payment will help you get a higher credit score in very less time.
2. Limit your credit utilization ratio
Generally, borrowers with a good credit score have lower credit utilization. Credit utilization ratio is the percentage of credit you are currently using from your credit limit. Suppose you have a credit limit of Rs. 70,000 and you are using only Rs. 28,000, then your credit utilization ratio will be 40%. Using 30% or less of your credit limit shows that you are a responsible borrower and know how to handle your credit responsibly. You should not use your credit card everywhere. If you limit your credit utilization to 30% or lesser, it will help you build your credit score by some points. Keeping your monthly balance low reflects well on your credit score. If you have multiple credit cards, you can get a personal loan for debt consolidation.
3. Make sure all your loans are closed
If you have defaulted on an old loan, it is reflected on your credit report. It will lower both your credit score and creditworthiness. You should immediately close the loan and make sure that your credit report has a ‘closed’ status not ‘settled’ because settlement can have a negative impact on your credit report. When you settle a loan, it means that you are not paying the original amount owed to the lender and the lender is taking the loss. Hence, you should close old loans instead. After closing the loan, get a closure certificate from your lender.
4. Length of credit history
Credit scoring model takes into account how long have you been using credit. How old is your account and how long have you had obligations for? Long credit history is helpful as it offers a better picture of how responsible you have been with managing your credit for a long time. This is why credit experts suggest leaving your credit card account open, even if you are not using it.
5. Get a personal loan for debt consolidation
It is difficult to manage different debts with multiple lenders. Each debt has its due date, charge and payment method. As a result of that, you may miss a credit card payment, which will attract a higher interest rate over time. In such cases, you can get a personal loan to consolidate your different debts with multiple creditors, as a single and larger piece of debt. By paying off your all credit card bills on time, you can improve your credit score.
1. Outstanding debt
You should always clear your outstanding dues even if the amount is small. While calculating your credit score, credit scoring models evaluate your outstanding debt. Unpaid dues reflected on your credit report can wreak havoc on your credit score. Moreover, you should keep your credit card balance low, because if the amount you owe is close to your credit limit, it will have a negative effect on your credit score.
2. Applying for multiple loans
You should not apply for a loan or a credit card with multiple lenders. When you apply for a loan, it creates a hard inquiry on your credit report and too many hard inquiries can bring your CIBIL score down. Even if you have a good credit score for years, this minor mistake can hurt your credit score by some points. If you are looking for a personal loan or credit card with the lowest rate, you should conduct online comparison instead. Online tools use minimum information about a borrower, and soft inquiries are outside a lender’s knowledge.
3. Closing old credit card accounts
Credit cards are a great way of building a credit score. But, when you close your credit card accounts, you lose a part of your credit history associated with them. You should not close a credit card that you have used for a long time. You can close a relatively new credit card account.
4. Increasing your credit limit frequently
While a greater limit gives you the flexibility to access more debt, it can affect your credit score adversely if not used carefully. While evaluating your eligibility, requests for a frequent increase in your credit limit can be seen as a sign of being dependent on credit to handle expenses.
5. Ignoring your credit report
You should get your credit report from Credit Bureaus – TransUnion CIBIL – and search for errors. Your credit report may contain some administrative errors. Lenders may make some data entry related mistakes. For instance, due to communication the gap, your credit report might show a paid installment as unpaid. You should immediately report the mistake to the Credit Bureau. Credit bureaus are supposed to take action on the dispute within 30 days. Your CIBIL score will go up by some points after the errors on your credit report are removed. Don’t apply for a new credit card or a loan unless your credit report is updated.
Having a good CIBIL score helps you get your loans approved. Moreover, with a good credit score, you can get a personal loan at most favorable terms.
Apart from these factors, customers must be aware of the impacts of soft and hard inquiries on their CIBIL report.