CIBIL or Credit Information Bureau (India) Limited was established in August 2000 and is known to be the first credit information company in India. When someone applies for any form of credit, be it a home loan, personal loan, car loan or a credit card, the banks get the applicant’s credit rating from CIBIL to decide on whether or not the person qualifies for a loan or not.
How it works is that all the credit information is sent to CIBIL by the banks. This information is mainly about repayment of loans and credit cards. This information is then taken by CIBIL and computed into a number between 300 and 900. If scores are close to 300 then the credit rating is considered to be bad and in all likelihood loans and cards will be rejected. If the rating is 600 or more, it is considered good and the likelihood of getting the loan or a credit card is high.
CIBIL also keeps a history of payment behaviours, which means that when there is a default on a payment, it is recorded in the history and when banks request for someone’s history that defaulted payment is also mentioned in it.
This is not a service that has been created to ensure rejection of credit. It is a service that aims at reducing bad credit and, as a fringe benefit, allow borrowers to instil in them certain habits that not only lead to good credit scores but also teach sound financial planning.
How to keep the CIBIL score good
Even if someone meets all the criteria of age and monthly income for a loan or a credit card, applications could still get rejected if the CIBIL score is not good. The best way to avoid this situation is to inculcate certain habits that will help ensure that CIBIL scores never suffer.Pay on time
There is no doubt that on-time payments are the most preferred payments. If payments are made on time it indicates a responsible behaviour towards credit, which in turn means that the credit score is not affected negatively. If credit card or loan payments are not made on time then it indicates lack of proper financial planning and can bring down the credit scores.Full payments for credit cards
There are two options every credit card holder has when the bill comes. The first option is to make the entire payment in one go and the other is make the minimum payment indicated by the bank. While going for the second option may get banks off your back about the amount due, for CIBIL the amount not paid back is considered as an overdue amount which means that the customer’s financial management is not good. To avoid this, always make sure you go in for option 1; pay all credit card bills in full.Earn more spend less
Earn more and spend less does not mean that salaries have anything to do with CIBIL scores. It just means that don’t spend more than your earn. When the spending exceeds the earnings the need for credit arises, which in turn may lead to more spending and collection of debt. Creating an emergency fund is a good way to avoid credit for small things.Never default
If you have taken a loan or own credit cards, make sure you make all the payments. If you miss a payment or default, it gets noted in the credit history and brings the score down or creates problems when the time comes to take a loan in the future.Don’t be credit hungry
Credit hungry behaviour could be continuously applying for loans. Every time a loan is applied for, the bank checks the credit report, for every check the CIBIL score comes down a bit. This will lead to a lowering of the overall score. The best thing to do is to not apply for a loan till you absolutely need one. Another thing to do is to check CIBIL scores yourself as that will not have a negative impact on the score.Keep the borrowing balanced
Keeping a balance in the borrowing means that a healthy mix in loans. Instead of just taking one type of loan all the time, take a home loan then a personal loan and then maybe a car loan, etc. The idea is to create a mix of both secured and unsecured loans. If there is too much unsecured credit, personal loans or credit card debt, it makes future lenders cautious about granting loans.Don’t close credit cards
It may seem counterintuitive to not close avenues that could get you into trouble with credit histories but the simple fact is that if you close all your credit cards then you won’t have a source to actually build a history when you need to take a loan. The ideal thing to do would be to take the card and use it very wisely.
Just like a car that fails to work if not maintained, credit history too can fail to work if it is not maintained. The idea behind inculcating these habits is that, if successfully inculcated, these habits will ensure that you never have to worry about your credit history. At no point will you have to worry about getting rejected for a loan or credit card.
Why is it Important to Monitor Your Credit Score Regularly?
One cannot ignore the importance of having a healthy credit score as it is the gateway that brings you closer to your personal goals of owning a house or a car. A high credit score also helps you get a credit card which offers you a financial independence. Let’s dive in and learn more about credit score and credit reports.What is a credit score?
A credit score is a 3 digit number between 300-900 that measures your credit worthiness. A higher credit score suggests that you have a healthy credit history and responsible repayment behavior. Generally, banks and non-banking finance companies (NBFC) consider a credit score of 750 and above as ideal. However, if you have a CIBIL score below 750, you can take small measures to improve it.What is a credit report?
A credit report is a detailed summary of your credit history and contains details such as current balance, loan amount, history of payment, credit limit, account type, account status, and payment history. It also consists of your credit score. A credit report is prepared by credit bureaus in the country after collecting data from various authentic sources and the companies. At present, there are a total of four credit bureaus in India viz; TransUnion (CIBIL), Equifax, Experian Credit Information Company and High Mark Credit Information Services. All these credit bureaus are licenced by the Reserve Bank of India (RBI). Each credit bureau has their proprietary algorithm to calculate a credit score depending on several factors.Importance of Credit Score
If you have a high credit score, you are eligible to get a loan or a credit card. A healthy credit score is your ticket to get a credit card as banks check your credit score before offering it. You also have the extra edge and can negotiate with the lenders for better interest rates for loans. With a credit score of 750 and above, you are in a position to get discounts, credit cards with better benefits and rewards. As you have displayed a responsible repayment behaviour, you can even ask for a higher credit limitFactors that Affect your Credit Score
- Repayment history: The repayment behaviour should be consistent and on time as it accounts for 35% of your credit score. Missing or delaying payments affects your credit score and brings it down.
- Age of the credit history: A longer credit history helps lenders take a sound decision on your ability to pay the loan. Hence, it is advised that you should avoid removing or deactivating old accounts from your credit report. The age of your credit history accounts for a good 30% of the credit score.
- Credit inquiries: Credit inquiries account for 10% of your total credit score. The number of applications an individual makes to avail credit has an effect on your credit score
- Pay all the bills on time: Never miss or delay your credit card payments as it reflects badly on your credit score.
- Bump the credit limit: One of the easiest ways to boost your credit score is to request your credit card provider to increase your credit limit. After increasing your credit limit, you should only about 30-40% of it as it suggests you are responsible in handling your credit.
- Do not close old accounts: When you remove your old account, it negatively affects your credit score as you are deleting a good credit history. All the records of payment should be kept in your report as they help in improving your score.
- Credit score monitoring: Checking your credit score from time-to-time helps you know the state of your credit status and gives you an opportunity to work on it.