After knowing the factors that affect your cibil credit score let us talk about ways to improve your credit score. But remember, there is no quick fix to improve your credit score but significant improvement can be made in the short run.
First, get your credit report
How will you ever know which area to focus without a credit report? Go to the CIBIL branch to apply for a credit report. Once you have the reports in the hands, you should look for any possible errors or mistaken entries that might be affecting your score involuntarily. Examples of such errors are a loan put under your name by mistake or some loan that you have already paid in full but it shows up as active overdue. If any errors are found, then jot them down and file one dispute resolution with the bureau for acknowledging the mistakes as soon as possible. If these negative things are removed from your report then you can expect your cibil credit score to increase significantly.
Maintain low credit card balance
The best practice is to keep the credit card balance as low as possible. Everyone knows the benefit of having a bigger credit limit –keeps your balance low and you have more flexibility for payments. Your score will see a direct impact of this.
Keep the old cards and don’t get new cards
Your focus should be more on improving your score with existing cards. Yes, new credit cards will offer you a higher credit limit but think about the extra spending that you will make. That means you will be risking yourself for not making timely payments. That extra spending can disrupt your budget and credit score, both. Also, try not to drop your old cards because it causes your overall limit to drop. If your credit limit drops then, it will decrease your score. Concentrate on making the least possible use of your existing cards for improving your credit score.
Spend less than 50% of your limit on credit cards
Your credit utilization ratio is another major factor in deciding your credit score. If you keep it low, you keep your credit score as low as possible. Considering that a person has 50,000 INR credit limit then that person should not exceed 25,000 INR benchmark expenses on his card.
Try reminders if you forget dates
Many people complain that they forget the deadlines of bills. Luckily, you are living in the era with smartphones to remind you of everything. Set up reminders of deadlines. Repayment history, as said earlier, accounts for 30% of credit score. Thus, it makes it of utmost importance to make repayments on time and in full. Your bank or respective billers can send you SMS about the payment deadlines. Tech has also enabled automatic payment of bills as well, try that.
These steps can be carried out in a very short amount of time and show some positive effect on your score.
LOW CIBIL SCORE REASON
Most of the times the main cause of low cibil credit score is people’s lack of awareness about how the credit score is calculated. The following mistakes are commonly observed
Late credit card or loan repayments
There are plenty of reasons why people skip or delay them. Mostly, they are unexpected expenses like medical emergencies; children’s might need money etc. you may think that skipping one or two payments won’t make much of a difference if you make the full payment later on. You are wrong if you think the same. Even one late payment can drop your score significantly. Even your full payment won’t compensate anything and can’t do anything to raise your score back.
People also forget the billing date due to oversight. Reminders are the best way to help in such a situation. Banks also have automatic billing option for people like you. If you get the auto-debit arrangement in place then make sure that you have enough money in your bank account. These are some silly mistakes that people can easily fix and also easily commit.
Applying for loan at multiple lenders
Every time you make an application for a new loan to a new lender, the lender carries out a hard enquiry on your credit report. Every hard enquiry drops your cibil credit score. You can avoid this mistake by looking at prospects of various lenders online and then applying for loan or credit card to that lender where your chances of succeeding are the most. Only apply to those places where you think you have a great chance of being accepted as every loan rejection drops your credit score.
Large number of unsecured loans
Those loans which do not require collateral securities are called unsecured loans. The best examples are personal loans and credit cards. Having too many unsecured credits signifies that you have too many monthly repayment obligations.
Spending more than 50% of your credit card limit
Yes, we talked about it above but when you spend more than 50% of your credit limit, then it implies that you don’t have strong spending discipline. This definitely has a negative impact on your credit score. As easy it is to commit these mistakes, it’s of the same difficulty to avoid these mistakes.
WHAT COULD BE THE POSSIBLE REASONS IF YOUR LOAN IS REJECTED EVEN AFTER HAVING A GOOD CREDIT SCORE?
There could be times when your loan application got rejected even after having a good score of 750. While you may think you have done your best, but in actual, there are some areas which could have possibly lead to rejection of your loan.
Some of the previous loans were settled or written off
Having account loans that were not repaid in accordance with original terms of the loan, warns the future lenders of your lack of financial responsibility. This is a clear indication that you were unable to pay the loan, and you are not a responsible even if you have paid all the recent loans fully.These types of loans leave a bad impression on your lender and you become a risky customer in their eyes.
You were a guarantor for a defaulted loan
It may come strange to you but if you have been a guarantor for a loan that was not paid completely, then your credit score also suffers.
Maybe you are mistakenly marked as a defaulter
You may not know about this, but if you have recently shifted to a new house that was occupied a defaulter previously, then you will be considered a defaulter. Banks will reject your application right away because your address will match that of a defaulter. You can get it fixed it easily though.
Ratio of debt to income
Your loan can be rejected even if you have many current loan obligations. Too many obligations would require a large part of your monthly income to go into maintaining your existing debt. You may have a great cibil credit score because of your timely repayments but it is not worth it because lenders would think you are not capable of maintaining a new loan. There’s a limit to the percentage of your income that can be put into maintaining your loans. After that, lenders doubt your ability to take on further loans. Consider if you earn INR 30,000 monthly and INR 20,000 goes in paying debts, then you are left with only a little amount to spend on personal expenses. Banks would consider that you can’t afford another loan.
High number of unsecured debt
Unsecured loans (those without collateral security) are not good for your credibility. Their impact won’t be visible on credit score but it matters. You should have more of secured loans than unsecured loans.
Live in only some particular postal codes
This may sound very odd to you but sometimes your loan could be rejected just because you live in a place which is considered ‘high-risk’ locality by your bank. Banks describe some localities as highly risky with the help of statistical data. It depends on incidences of default from the localities. Even your good credit record can’t help you in such a case.
CIBIL score for Home Loan
In order to qualify for a home loan, your credit score should be above 700. Closer your score is to 900, better chances your application has of being approved. A higher credit score will attract offers like lower interest rate, more amount on loan, easy documents, and longer repayment periods. You can loan up to 80% of total cost of the property.
CIBIL score for Car Loan
There is no fixed minimum required to qualify for an auto loan. However, chances of rejection are high if your score is less than 750. People also get an auto loan with a low credit score as the automobile itself can work as the collateral security.
You can even get the loan without CIBIL score because the bank will take your car into custody if you can’t pay the bill. Though, it’s a tardy process.
Effect of Education Loan on CIBIL score
Education loan is like any other loan; you have to repay the loan completely to keep up with good credit score. There is a leniency in it that it can be paid after the borrower gets employed or completes his course of study.
A lender looks at an education loan as any other loan and like any other loan; information about its payment is shared with credit bureaus. All the information is reflected in the borrower’s credit report. Non-repayment of education loan will surely affect the credit score of the borrower.
Education loan with low CIBIL score
Generally, it is difficult to avail any type of loan with a low credit score. But education loan is a bit different as the lender can consider the performance of borrower in academics, the reputation of the college, placement prospects of the college and annual income of the family. You can also put some collateral security. If you have more chances of withdrawing a handsome salary then you have higher chances of the loan being accepted.
You may need at least 700 CIBIL scores to apply for an education loan.
CIBIL score for personal loans
Personal loans are unsecured loans i.e. they do not require any security for acceptance, therefore, the acceptance of such loans solely depend on your credit information report. They are different from auto loans or home loans as in such cases the vehicle or home can work as the collateral security. So, lenders do extensive background research of the applicant to judge his reliability. The borrower should apply if his score is above 750 and banks are strict on this one.
Other factors affecting personal loan
Personal loans are hard to be sanctioned; lenders also look at the annual income of the borrower, company profile, and present loan obligations.
What is a personal loan used for?
As the name suggests, personal loans can be used for any personal expense. These can range from wedding expenses, hospital expenses, or home renovation or a vacation. The loan amount comes with no restriction on how you spend it.
Interest rates on personal loans
The rate of interest on personal loans differs from lender to lender. While in respect to other loans (home loan, auto loan, business loan etc.), personal loans have the highest rate of interest. The reason is, obviously, no collateral security. The credit history of borrower and amount of loan also decide the rate of interest.