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.