Your credit score is one of the key factors that determine the interest rate, loan amount, and tenure that will be offered to you. A high credit score, typically above 750, can increase your chances of getting a Home Loan at favourable terms, as compared to a low CIBIL score.
It is essential for borrowers who are planning to avail of a Home Loan to understand the various factors that affect their CIBIL scores to assess their loan eligibility.
Factors that Affect Your CIBIL Score
1. Outstanding Debt
Sometimes borrowers may find it challenging to keep up with EMI payments, which can lead to defaulting on the EMIs. Similarly, some individuals can fall into a cycle of debt by only paying the minimum amount due. Such practices can negatively impact one's CIBIL score. To avoid missing your EMI payments, you can benefit from setting up payment reminders or exploring the option of a debt consolidation loan to combine all your loans into one. This can streamline finances and simplify repayment obligations.
2. Rectify All Errors in Your Credit Report
At times, an individual's credit score or credit rating might drop due to inaccurate information given to the credit bureaus. In these instances, borrowers need to review their credit reports regularly for any inaccuracies. If they find any errors in their credit report, they must dispute it with the respective agency and get it rectified immediately.
3. No Credit History
When borrowers close a loan account, they essentially delete all the information that built up their credit history. Without this information, credit bureaus do not have sufficient data to evaluate your creditworthiness, which may result in a reduction of your credit score. Therefore, it is advisable to maintain these accounts even after repaying debts to preserve your credit profile.
4. 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 can be offered at high interest rates. Demonstrating a good credit mix generally shows that you can handle different types of credit responsibly. This can have a positive impact on your credit score and overall creditworthiness.
5. Having a High Credit Utilisation Ratio
Your credit utilisation ratio indicates the proportion of revolving credit you are utilising compared to your total available credit. A high credit utilisation ratio affects an individual's credit score negatively. Ideally, borrowers should maintain a credit utilisation ratio of about 30%. If you are planning to apply for a loan, take some time and work on your credit score before initiating your loan application. Know that credit ratings take some time to improve.
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.
6. Making Multiple Applications for Credit Card Simultaneously
Your creditworthiness is assessed when you apply for a loan by checking your credit report. This is known as a hard inquiry. If you submit several applications, numerous hard credit queries will take place at the same time. This will have a negative impact on your score. Hence, avoid making several loan applications simultaneously and apply for a loan only when necessary.
7. 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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Importance of Good CIBIL Score
A good CIBIL score is an essential aspect of financial health and plays a significant role in securing credit and loans. Here are the key benefits of maintaining a high CIBIL score:
1. Quick Loan Approvals
A high CIBIL score (typically 750 or above) can increase the chances of quick and hassle-free loan approvals.
2. Lower Interest Rates
Lenders may offer lower interest rates on loans and credit cards to borrowers with a good CIBIL
8. Eligibility for Pre-Approved Offers
Financial institutions often provide pre-approved loans and credit card offers to individuals with good credit scores, saving time and effort during the application process.
Conclusion
Understanding the factors that impact your CIBIL score is essential to maintain financial health. A good CIBIL score ensures quick loan approvals, lower interest rates, and better financial opportunities. By practising responsible credit habits and addressing errors, you can enhance your creditworthiness and secure favourable credit terms.
Frequently Asked Questions
The following factors affect your CIBIL score:
- Payment history
- Credit utilisation ratio
- Credit mix
- Length of credit history
- Errors in the credit report
- Number of credit applications
Yes, late payments can negatively impact your CIBIL score as payment history is a key factor in its calculation.
Yes, the length of your credit history affects your CIBIL score. A longer credit history with consistent and timely payments helps build a strong credit profile. Starting early and maintaining accounts responsibly contributes to a higher score over time.
