What is Credit/CIBIL Score ?
Credit score is a number of three digits (usually between 300-900 in India) which is an analysis of your financial history and indicates your credit worthiness, that is, how reliable you are in taking and repaying your loans. This score is mostly calculated in India by credit bureaus like CIBIL (Credit Information Bureau India Limited) based on the information received from banks and loan data, hence it is also called “CIBIL score”.
Importance of Credit Score & How does it Work?
If you apply for a loan or credit card anywhere, then the bank or wherever you apply for credit card/loan first checks your credit score, on that basis only you get the approval and credit score is also very important for how much credit limit or loan you will get and what rate of interest you will get. From this we come to know the importance of credit score in our financial life.
Your credit score keeps an eye on your financial management. It looks at whether you pay off your dues on time when you take a loan or credit card, how much you use your credit limit, how many loans or credit cards you keep active or for how many times you close them, and how many loans you apply for at a time. A good credit score (usually 750+) helps you get credit easily, higher credit limits and credit at lower interest rates. On the other hand, a bad credit score makes you feel risky as it can lead to higher interest rates, lower credit limits and difficulty in getting approvals, which can even result in your credit application getting rejected. Credit bureaus like CIBIL, Equifax and Experian calculate your credit score using all these information.
How/Tips to Improve Credit Score
1. Pay your Dues & Bills on Time
One of the most important ways to improve your credit score is to pay all your bills like credit card bills, EMIs or loan dues on time. When we pay our bills and dues on time, it shows our lenders how trustworthy and responsible we are. On the contrary, if we do not pay our dues and bills on time, it has a negative impact. By making timely payments, we also avoid late penalties and fines, which saves us from financial loss. Timely payments create a strong credit history and improve credit score.
2. Avoid Multiple Credit Application At Once
We should keep in mind that we should apply for a new credit card or loan only when we need it. Maintain a proper time gap between applications and avoid applying for multiple credit applications at a time because whenever we apply for a credit card or loan, the lender checks our credit score which reflects and impacts our credit score. It often happens that we apply for a credit card or loan at one place and if it gets rejected then we apply at another place but doing this has a negative impact on our credit score, we should avoid this and if our application gets rejected then we should find out the reason for it and improve it and apply again after some time which helps to improve our credit score.
3. Keep an Eye on your Credit Report.
For a better credit score, we should check our credit reports regularly. Many times, there are some small mistakes in our credit reports which we do not detect due to regular checking of our credit reports, due to which our credit score gets negatively affected. For example, we had taken a loan from a company, which we have closed by making the payment a few months ago, but it has not been updated on the portal and is still showing as active, due to which our credit score is going down. If we check our credit reports regularly, then we can get this problem resolved and get it updated on the portal by talking to customer care. Therefore, always keep an eye on credit reports for a healthy credit score.
4. Keep your Credit Utilization Ratio Low
For a good credit score it is important to keep your credit utilization ratio low. If we talk in detail then nowadays we Indians make a big mistake that we do not pay attention to the fact that we use our credit limit excessively which has a negative impact on our CIBIL score and CIBIL score becomes low, for example we have a credit card with a limit of Rs 200000 in which we have used Rs 180000, means we use 90% of it, which is a mistake we make and due to this our CIBIL score goes down. One reason we’re overusing our credit limit these days is that we lend our credit cards to friends or use one to pay off another, a very bad habit. To maintain a good credit score, we should ensure we don’t use more than 30% of our total credit limit.
5. Maintaining A Good Credit Mix
Maintaining a good credit mix significantly contributes to strengthening and increasing your credit score because it shows lenders and banks how you handle different types of credits. A good credit mix means maintaining a balance between secured loans (gold loans, home loans, car loans) and unsecured loans (credit cards, personal loans). If you maintain only one type of loan, such as personal loans, your credit score does not increase as quickly as maintaining a variety of loans. Maintaining a good credit mix not only increases the credit score but also helps in getting loans at lower interest rates in the future.
6. Keep your Old Well-Managed Credit Accounts Active
We often think that closing old credit accounts strengthens our credit score, but this isn’t always true. In fact, long-standing and well-maintained credit accounts reflect our long-term credit history, leading to a stronger credit score. Closing long-standing and well-maintained accounts shortens our credit life, so keep your old, well-managed credit accounts active for good credit health.
7. Avoid Becoming A Guarantor
We Indians are often emotionally charged, which is why we readily guarantee loans to our friends and relatives without a second thought. When you guarantee someone, it simply means you’re assuming full responsibility. Many people don’t realize that if the person whose loan we’re guaranteeing doesn’t pay the installments on time or defaults, it impacts our credit score, lowering it. For a good credit score, we should remember to avoid easily guaranteeing anyone’s loan.
8. Use Tools and Alerts
Nowadays many banks, credit bureaus and card companies are providing online tools and applications with the help of which we can keep track of our credit reports, get alerts for our EMIs and dues and get suggestions to improve our credit score. Also, we can set reminders and alerts to get information about our EMIs, credit card bills and dues before the due date. This helps us in clearing our EMIs, bills and dues on time, thereby improving our credit score.
9. Use FD Based Credit Cards
An important way to improve your credit score is to use FD-based credit cards. FD-based credit cards are secure credit cards issued by banks based on fixed deposits made with them. For example, if you have an FD of ₹20,000, the bank will issue you a credit card with a limit of ₹16-18,000. If you make timely payments, this will help improve your credit score. FD-based credit cards are secure, so they are easily available even with a low or no credit score.
How much time It take to Improve Credit Score
Improving your credit score requires some time. It doesn’t improve in a few days; it requires time, dedication, and consistent effort. Generally, improving your credit score can take anywhere from 6 months to a year or even longer, depending on your current score and how much you’ve improved your financial habits. By following the tips to improve your credit score in this blog, you can improve your credit score quickly and open the door to credit offers.