Your credit score is one of the key things that determine the interest rate, loan value and tenor that will be offered to you. A bad credit score will not only lead to you getting a loan offer on unfavourable terms and conditions but can also lead to your application getting rejected altogether.
Therefore, those planning to avail of a loan of any kind such as a Home Loan, Top-up Loan and Loan Against Property must develop an understanding of the various factors that affect CIBIL scores and use this knowledge to their best advantage
Factors that Affect your CIBIL Score
Outstanding Debt
Many borrowers do not pay EMIs not because they do not have money, but because they forget to do so. Many individuals, on the other hand, get into the habit of paying only the minimum due and eventually get struck into a debt cycle. Missed EMI payments and outstanding debt for CIBIL are bad things. Therefore, try and pay all your EMIs on time and pay more than just the minimum due. If you have multiple loans running and you find it difficult to remember EMI dates, you can benefit from setting up payment reminders or availing yourself of a debt consolidation loan to combine all your loans into one.
Make Sure to Get All Errors in Your Credit Report Rectified
Sometimes, an individual's credit score or credit rating goes down not because of bad credit behaviour but because of the mistakes made by different institutions while reporting the individual's financial statements. So, borrowers must check their credit rating from time to time and make sure no errors are ruining their credit rating.
No Debt History
Often once they have cleared a loan, borrowers close their loan account. This is a mistake one should never make - when you close a loan account, you essentially delete all the information that built up your credit history. In the absence of this information, you have no debt history and therefore, no credit rating.
Not Maintaining a Healthy Mix of Credit
Loans are of two different types -- secured and unsecured. Secured loans are backed by an asset and usually attract a low-interest rate. Unsecured loans, on the other hand, do not involve collateral and are sanctioned by lenders for a short period and at high-interest rates. Borrowers should try to maintain a healthy mix of both types of loans. This would show their lender that they can handle all kinds of loans and their EMIs.
Having a High Credit Utilization Ratio
The credit Utilization ratio is the ratio of money you have available with you as credit vs. the money you have spent.
A high credit utilization ratio affects an individual's credit score negatively. Ideally, borrowers must maintain a credit utilization ratio of about 30%.
If you are planning to apply for a loan, take some time and work on your credit score. Know that credit ratings take some time to improve. So, start the process of improving your CIBIL score at least a few months before initiating the loan application process.
Making Multiple Applications for Credit Card
Lenders will want to assess your creditworthiness when you apply for a loan by checking your credit report. This is known as a hard inquiry. If you submit several applications, numerous credit queries will take place at the same time. This will have a negative impact on your score as It makes you appear credit-hungry.
Credit History Length
Credit history refers to the total number of years since you initially started a credit account. If you have a long credit history, it helps lenders make sound decisions when extending loans to you. It is preferable to focus on creating a good credit record earlier in life so that when the time comes to apply for a loan, you will have an excellent credit history.
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