What Does Your Credit Score Talk About You?

Before they sanction a loan, lenders want to feel confident about a borrower’s repayment capacity. The eligibility requirements set by lenders help them do so. Eligibility requirements for loans revolve around several factors, such as the applicant’s age, income, job stability and credit score. Of these factors, the credit score is the most important and influential.

A credit score is a numerical representation of a borrower’s creditworthiness and repayment capacity. Lenders and other financial institutions pass on information about credit users to credit rating agencies which study the data provided to analyse the borrower’s attitude towards credit. Based on their assessment, each credit user is assigned their credit score. A borrower’s credit score varies between 300 and 900 – the closer a credit user is to 900, the better their chances of getting approved for a loan and availing of it on beneficial terms and conditions. Lenders look into a loan applicant’s credit report details to analyse whether they will repay the loan on time and decide the loan amount to be sanctioned to them as well as the terms and conditions of the loan.

In India, four credit agencies are authorized by the RBI to assign credit ratings. These are Experian, Equifax, CRIF Highmark and TransUnion CIBIL. Of these four, TransUnion CIBIL is the most important and therefore, the term credit score is often considered synonymous with CIBIL score in India.

What is a Good CIBIL Score?

It does not matter the type of loan you are applying for – secured or unsecured – a CIBIL score of 750 or above will help you achieve quick approval, as well as low interest rates. Now that we have a basic of credit score meaning, let us dive into factors that affect a borrower’s credit rating and how to improve and maintain CIBIL score.

Factors That Affect a Borrower’s Credit Rating and How to Improve CIBIL Score

Several factors affect CIBIL score. Let us look at these factors and how borrowers can improve their CIBIL score.

Credit History:

The credit history is the most influential factor that affects CIBIL score. It is responsible for around 40% of your CIBIL rating. Borrowers who pay bills and credit EMIs on time and have no cases of default automatically have high credit rating. So, here’s our first and most important tip on how to improve CIBIL score.

#Tip 1: If you want to improve CIBIL score, make it a point to pay all credit card bills and EMIs on time. Set up auto-payments and reminders so that you don’t forget due dates. In case you miss an EMI due date, clear the EMI as soon as possible.

Credit Exposure:

The way a borrower uses their credit card also impacts their credit score. Borrowers who exhaust their credit card each month and then pay only the minimum amount due are considered unreliable by credit rating agencies and therefore, have a low CIBIL score.

#Tip 2: Those who want to improve and maintain CIBIL score must make it a point to limit their credit utilization ratio. They should make it a point to never use more than 30% of the credit limit available to them. They should also get into the habit of clearing the entire amount due on their credit card each month and not just the minimum amount due.

New Credit:

Another key factor that affects the CIBIL score is the credit and loan applications you make every year. Borrowers who apply for credit very often are considered credit-hungry. Lenders do not like such individuals and neither do credit information bureaus. Therefore, such individuals are assigned a low credit score by credit information bureaus.

#Tip 3: Borrowers must apply for loans and credit cards only when they need it. Every loan and credit card application generates a hard enquiry and too many hard enquiries ruin a borrower’s CIBIL score.

CIBIL Report Errors

Credit rating agencies assign credit scores based on the information passed on to them by financial institutions. Though financial institutions try their best, sometimes it gets hard to keep a track of millions of customers. Therefore, at times, banks and lenders pass on the wrong information to credit information agencies, which in turn, pushes down a borrower’s CIBIL score.

# Tip 4: All credit users must check their CIBIL report at least once every year and make sure there are no errors in the report. In case they see any errors, they must report it immediately.

Credit Mix:

Borrowers who have a healthy mix of different types of loans have a high credit rating as a healthy credit mix convinces lenders and credit rating agencies of a borrower’s ability to handle all types of credit.

# Tip 5: Maintain a healthy mix of both secured and unsecured loans in your loan kitty.

What Does Your Credit Score Tell a Lender About You?

Lenders check a borrower’s CIBIL score primarily to understand the risk involved for them in lending money to the borrower. As mentioned before, a borrower’s CIBIL score primarily shows their attitude towards credit. It tells a lender whether the borrower will repay the loan on time or not and the likelihood that they will default on loan repayment. Thus, the concept of credit scores helps lenders decide whether to grant a loan to a borrower and if yes, on what terms and conditions.

Final Words

If you see yourself applying for a loan such as a housing loan in the near future, you must make sure your credit score is at least 750. Such a credit score indicates high creditworthiness and repayment capacity. Borrowers who have such a credit score get offered low interest rates and long repayment tenor on their loan. Low-interest rates help keep EMIs affordable and also reduce the total cost of borrowing the loan. A long tenor, on the other hand, makes the process of loan repayment easy and stress-free. If your CIBIL score is not 750, use the tips mentioned above to improve CIBIL score before beginning the loan application process.

Also Read: Tips to Maintain Your Business CIBIL Score Above 700