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Dig deeper into the intricacy of credit scoring in India and learn how you can easily turn a bad credit into an excellent one.
Have you ever found yourself in a situation where you need to arrange some money urgently, but every door you knocked was shut in your face because of haven't improved your low credit score?
We understand how frustrating it can be. Your ineligibility is maybe because of your bad credit score.
Credit score. It's a simple three-digit number that helps money lenders judge your worthiness as a borrower – whether you can pay back the borrowed money correctly.
Even a slight dip in your credit score can cost you your eligibility to take loans or apply for credit cards for the rest of your life. There's more. Poor credit can affect your eligibility to convert your purchase into EMIs and avail of a low insurance premium. But if you are an Indian, you may have heard of 'CIBIL Score instead of credit score.' So, what is it?
Getting to Know CIBIL Score
Indian financial institutions and money lenders use a credit score called 'CIBIL Score' to measure a person's credit worthiness. It is a three-digit summary of your credit history.
This score indicates whether you can repay a loan and your financial stability. It demonstrates how likely the person will default on their loan repayment and bills.
It ranges from 300 to 900. The closer your score is to 900, the higher the chances of your loan application getting approved. Ideally, most loan providers and credit card companies consider the 750-900 range as the perfect credit score.
It is the first thing a lender checks while evaluating your application. You must know that nearly 90% of the loans are sanctioned to people whose CIBIL score is 750 or higher.
How CIBIL Score is Calculated
In western countries, five factors accounted for determining an individual's creditworthiness:
- Payment history
- Credit utilization rate
- Credit history length
- New credit
- Credit mix
However, in India, the rules are a bit different:
What Affects Your Credit Score?
Bad credit history is harmful to anyone's financial health. But first, it is crucial to understand what actually dampens your CIBIL score. Having the right information can help you become careful with making any mistakes.
1. Making Late Payments: Consistently making late payments or defaulting on your EMIs and dues tumbles down your credit score massively.
2. Using Most of Your Credit Limit or Maxing Out: We understand the allure of having an abundance of money in hand. It makes you spend more. But utilizing a major chunk of your credit limit or maxing out on your credit card increases your credit utilization ratio. The higher this ratio is, the lower your credit score becomes.
3. Multiple Loan & Credit Card Applications: If you frequently apply for loans or credit cards, every application prompts the lender to enquire about your credit history. It's called a hard inquiry. Multiple instances of hard inquiry result in a low credit score.
4. State of Credit Mix: Having a healthy mix of secured credit (home loan, auto loan, education loan, personal loan) and unsecured loan (credit card) shows that you are responsible enough to handle a new line of credit. It improves your chances of qualifying for new credit.
How To Boost Your Credit Score Fast?
1. Always Pay Your Debts On Time
This is the ultimate rule for improving your credit score. If you are already on the deep end, contact your credit card provider and devise a suitable payment plan. From them, maintain responsible credit management habits.
Don't miss your credit card payment due date by even one day. Avoid paying late fees and high-interest rates. Not only will you save your hard-earned money, but your credit score will also improve drastically if you pay your bills on time.
Although, make sure to check your credit card statement and ensure you are not being overcharged before making any payment. Check out this blog to know whether your credit score is good or bad yourself.
2. Use Not More Than 3 Credit Cards
Having only one credit card can put an unnecessary burden on your credit summary. While this is true, it is ideal to use multiple cards to keep your credit score in check.
However, if you have numerous credit cards that are also bad for your financial health, use three credit cards from major creditors to maintain a balance.
3. Reduce Your Credit Utilization Ratio
The credit utilization ratio means how much credit you have used from your available credit limit. Maxing out your credit card is a terrible sign for any money lending company.
They check the outstanding balance of your total credit limit. In this case, the less you owe, the better. For instance, person A has used ₹5000 from his ₹50,000 credit limit.
On the other hand, person B has used ₹30,000 of his ₹50,000 balance. Naturally, the money lender would prefer person A for his responsible financial behavior. Experts suggest keeping your credit utilization ratio within 10-15% to maintain a good credit score.
4. Get A Bigger Credit Limit
A smaller credit limit tends to increase the burden on your credit utilization ratio, which minimizes your credit score. For instance, if you use ₹12,500 of ₹25,000 of your total credit limit, your credit utilization ratio becomes 50%.
Instead of struggling to reduce that rate, you can simply ask your creditor to increase your credit limit. For example, if your credit limit doubles to ₹50,000, your credit utilization rate will automatically reduce to 25%. This will create a major impact on your credit score.
5. Become An Authorized User With A Family Member's Good Credit History
Do you have any family members whose credit score is high? Then get an add-on credit card from them. Thus, their long credit history, on-time payment, and minimum credit utilization ratio can substantially improve your credit score.
6. Get Secured or Rebuilding Credit Cards
Many banks and credit card companies offer specialized credit cards for people with poor credit scores. These credit cards help in credit rebuilding. These secured or rebuilding cards are issued against collateral like bank fixed deposits.
If the borrower fails to pay their bill for 90 days and more, the lender has the right to recover the borrowed money from the fixed deposit.
7. Fix Error In Your Credit Report
It's natural to make mistakes. Everyone makes mistakes once in a while. But one small mistake in your credit report can significantly affect your credit health. So, review your credit score report every month diligently.
Do not believe if someone tells you downloading a credit report is harmful. If you have never missed your payment date and you have found an error in your report, make sure to lodge a complaint. Remember, no mistake is too small to correct.
8. Repair Your Credit Score
You can get your credit score repaired and rebuilt by a third-party provider. There are many affordable credit repair organizations available that boost your credit score. They can fix the damage you might have done because of faulty financial behavior. Thus, you can easily become eligible to get a loan by improving your credit score.
Good to remember: Credit repairing is a long process. It sometimes takes 4 to 12 months to improve your credit score and become eligible for a loan.
Understanding the intricacy of CIBIL score is essential to build up your credit score successfully. Once you are well aware, you can substantially improve your creditworthiness to become eligible for loans with a low-interest rate and longer duration or credit cards with attractive benefits and offers. All you have to do is follow responsible credit behaviors.