A credit score is a reflection of an individual’s creditworthiness. Therefore, it is important to have a healthy credit score as it can have a huge impact on your financial practices and day-to-day activities. Your credit score helps lenders determine your financial behavior and repayment history. It also helps them to decide the interest rate they would be offering you when you apply for a loan with them. Be it a bank or an NBFC, the rule is simple, the higher the credit score, the lower the interest rate offered.
You might be surprised to know, but many employers too check for your credit history, to decide if you are worthy of the job. When applying for a home loan, this becomes even more important. Thus, protecting and improving your credit score is more critical than ever, and how you manage the following factors can create all the difference in shaping your credit score.
1. Loan Repayment History
When lenders get a home loan, personal loan, or digital loan application, the first thing that comes into their mind is: will they get paid back? Your payment history contributes to 35 percent of your credit score. Whether you clear your bills on time or delay them impacts your credit score more than anything else.
Critical payment issues, like collections, bankruptcy, repossession, or foreclosure can also significantly affect your credit score, thereby hampering your credit history. Therefore, to maintain a good credit score, it is important to pay all your existing EMIs and credit card bills on time.
2. Existing Debt
Your existing debt is also a major contributing factor to your credit score. For instance, if at present, you are repaying two or three separate loans – it can be a personal loan, an education loan, and a vehicle loan – you would have a low credit score till you manage to clear them successfully.
Hence, it is wise not to borrow multiple loans at the same time, unless the situation absolutely demands so. Even if you have multiple loans at a time, you should try opting for debt consolidation. It is a practice of taking a new loan at a lower interest rate and repaying multiple loans with that amount. This will not only help in improving your credit score but will also make you pay only a single EMI
3. Length of Credit History
The duration for which you have been using and managing credit plays a huge role in calculating your credit score. A longer credit history proves you have a longer track record of repayment and better experience using credit. Logically, the longer your credit history, the more precise lenders can be in deciding the amount of risk involved when lending to you.
However,it would only help when your credit history does not reflect late or missed payments. Financial experts recommend retaining old credit card accounts even if you don’t use them anymore. The age of these accounts will boost your credit score. Entirely closing your old accounts can show an overall decline in your credit score.
4. Credit Diversity
One factor that impacts your credit score is the diversity in your credit report. When creditors and lenders notice that you have been able to manage a diverse credit mix responsibly over time – let it be credit cards, mortgages, or home loans – it instills a sense of confidence. Thus, successfully maintaining a mix of types of credit can positively impact your credit scores.
However, that doesn’t mean you must open credit accounts you don’t require; rather, you may want to reconsider closing a paid-off credit account, as doing so can have a negative effect on your credit score. Closing the account can hamper your Debt-To-Credit-Ratio or the total credit amount you are able to avail of. Thus, keeping the account active and using it from time to time can help maintain a good credit mix.
5. New Credit Enquiries
Every time you submit an application that needs a credit check, an inquiry is set up on your credit report showing that you have submitted a credit-based application. Two or three inquiries don’t do any harm. But multiple inquiries, that too within a short period of time, can affect your credit score. So, limit your applications to maintain your credit score.
The best part is that only inquiries made in the past one year factor into your credit score. However, it’s important to know that inspecting your own credit report might result in a soft inquiry, which does not necessarily impact your credit score.
These are some of the important factors affecting your credit score in India. It is essential to understand them so that you are able to make better financial decisions with the utmost caution, whilst also realizing their impact on your CIBIL score. Typically, your CIBIL score is what helps lenders determine whether or not you should be granted a loan. Thus, maintaining your CIBIL score, which depends on factors like your credit behaviour, debt-to-income ratio, repayment history, credit cards you have used in the past, and the nature of your existing loans is of utmost importance.
If you focus on improving these points, you can give a boost to your credit score. It is suggested that one must check their credit score on a regular basis to ensure it is maintained at 750 or higher.
Implement these simple financial practices and level up your credit score.
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FAQs
What is a good credit score?
A credit score of 750 or above is considered good by the lenders.
How do I get my credit score to go up?
The easiest way to increase your credit score is to start paying your loan and credit card EMIs on time.
Is 900 a good credit score?
Yes, 900 is an excellent credit score to have as the lenders will be willing to offer you a loan at a lower interest rate.
What does CIBIL mean?
CIBIL stands for Credit Information Bureau (India) Limited. CIBIL is one of the four credit bureaus licensed by the RBI.
How much time will it take to increase CIBIL score?
Usually, it takes 4 to 12 months to improve your credit score.
