An understanding of the factors that impact a CIBIL score goes a long way to undertake financial measures to improve CIBIL score.
The CIBIL score is dependent on your credit history. While a credit score of 750+ is considered favourable to gain credit access, a score lower than 750 often leads to rejections.
Is a CIBIL Score Check Mandatory?
Yes, Reserve Bank of India (RBI) has made it mandatory for banks and NBFCs to check the CIBIL score of an applicant for credit cards or other loan options like an unsecured personal loan, a home loan, car loan and others.
The score establishes the creditworthiness of the applicant and if it is less than 750, it shows that the applicant is not creditworthy enough to get a loan from conventional financial institutions.
Ways to Improve CIBIL Score
There are many financial ways to improve CIBIL score, as enumerated below:
#1 Understand how CIBIL scoring works.
The CIBIL score ranges from 300 to 900. The score is nothing but a database highlighting the financial behaviour of the applicant. It records the history of loans taken, repayments, and foreclosures. Below is a representation of the factors considered in calculating the CIBIL score.
Notice that 30% is kept for past performance. If you have overdue payments, especially regarding credit card payment delays, it takes a serious hit on the overall credit score.
If you haven’t checked already, get your TransUnion CIBIL credit information report for a detailed understanding of the current credit score.
#2 Check for discrepancies in CIBIL report.
It is not unlikely to discover discrepancies in the credit report. Remember that the CIBIL report is built upon the information provided by the financial institution to the credit bureau. In short, if there are any errors, it means that the concerned financial institution misreported certain factors of your credit.
File for an appeal with the TransUnion bureau and the concerned institution has to respond within the next 30 days. Or, you can contact the concerned institution first and ask for a clarification before filing an appeal.
Do you remember the 20% devoted to the “Other Factors” in the above image? This comes in the “Other Factors” and needs to be handled with careful consideration. Read our detailed article to repair credit score.
#3 Do not withdraw credit card cash from ATMs.
Withdrawing cash from your credit card through an ATM is a cardinal error committed against your credit score. Why?
When a credit card is used for a retail purchase such as in shopping malls or to pay utility bills, there is a 20-50 day interest-free period after which the interest starts to accrue. But, when cash is withdrawn against a credit card, the interest starts to accrue from the next minute onward. Therefore, in this instance, you are not only paying a service fee for the cash advance facility, you are also paying an interest from that moment onward.
The total bill amount rises instantly, impacting your credit card utilisation ratio, and the credit score takes a massive fall. If you have taken a credit card cash advance in the near past, pay the outstanding amount immediately!
Never ever use the credit card cash advance facility unless you are in a dire circumstance with no cash liquidity available from anywhere else.
#4 Hold on to the oldest credit card.
Credit card is THE best tool to improve CIBIL score if utilised properly. A well-maintained credit card account with timely payments and zero outstanding balances is exceptionally useful to improve CIBIL score.
It is a misconception that if you are not using a credit card account, close it – please don’t! If you are not using the credit card actively, keep it somewhere safe but do not close it. It is an indicator of robust creditworthiness.
A long-term credit card account with zero repayment delays is a perfect way to improve credit score. The best way to keep it going is to pay monthly utility bills with it and repay on time.
#5 Avoid multiple credit inquiries.
The suggestion may seem like a volte face but it is a fact that if you have a CIBIL score less than 750 and you keep on sending loan or credit card applications which are likely to be declined due to low credit score, the CIBIL score keeps losing points.
Why? Whenever a new enquiry is sent, a bank or a NBFC has to send a hard inquiry to the CIBIL bureau. In return, the CIBIL bureau keeps on deducting points for every hard inquiry.
It is strongly recommended that unless you can improve CIBIL score to 750 upwards, avoid sending credit inquiries through any financial institution. First, improve CIBIL score and then apply because then you will have a higher chance of getting application approvals.
#6 Follow 30% credit card utilisation rule.
Let’s say you have a credit card with Rs. 50,000 maximum limit. Every month, you spend around 90%-95% of the maximum limit and make a full repayment when the bill is due. There has never been even a 24-hour delay in bill repayment.
Do you think this financial behaviour will reflect on the CIBIL score negatively or positively? You might say “positively” but you would be wrong. Why? It is because the industry acceptable credit card utilization stands at 30%, which means you need to maintain a 70:30 ratio, that is, 70% unused credit and 30% used credit.
Not only is this useful to improve credit score but also to get a second or a third credit card. Banks check the existing credit utilisation ratio before giving another credit card; if they see that the first one is always maxed out even though repaid always on time, approval chances are still low.
#7 Prefer a long-term loan.
As mentioned in #1, 30% of the credit score is dependent on past performance. Therefore, if you want to improve CIBIL score, ensure than any heavy amount loans such as a home loan or a car loan has a long-term EMI plan. Keep on paying these EMI’s on time, every time, and you will notice that the CIBIL score is gradually improving.
Always keep a track of credit score to avail the best possible credit opportunities. Keep the above ways in mind and improve CIBIL score anytime.