If you have ever taken a loan or plan to take one, you’d probably have heard about the CIBIL score.
What is a CIBIL Score?
Banks, NBFCs, and other financial institutions rely on your CIBIL score to evaluate your creditworthiness.
A CIBIL score is a value that ranges from 300 to 900. If you have a score of 750+, you are most likely to be considered as a creditworthy individual.
Why is it essential to have a good CIBIL score?
A higher score (750+) usually represents a creditworthy individual. If you have a higher score, your chances of getting a loan are much higher.
A higher score also gives you access to premium credit cards and other financial offerings.
If your score is less than 650, it will be tough to get loans for nationalized banks. You might have to go with higher-interest loans for smaller banks.
When you take an unsecured loan like a personal loan, a higher CIBIL score gives you the bargaining power to bring down your interest rate.
Note: There are other players like Experian, CRIF, etc. However, when it comes to banks, they usually rely on CIBIL. So it makes sense to focus on increasing your CIBIL score.
How does CIBIL calculate your Credit Score?
To improve your credit score, you need to understand how your score is calculated in the first place.
Here are some of the factors that impact your credit score:
#1: Your repayment history
How often and timely do you repay your existing debt obligations? This is a very important signal for lenders.
Repayment history contributes to around 35% of your score.
#2: Your credit utilization
Credit utilization takes into account the total credit available to you and how much you have utilized.
If the total credit available is 1 Lakh and you have used 10,000, that means your credit utilization is 10%.
A credit utilization score of <30% is considered ideal.
Credit utilization contributes another 30% weightage to your credit score.
#3: Credit history
How long you have availed the credit for and how frequent you were with repayments factor into your score. This means that it’s good to hold on to your old bank accounts, credit cards, etc.
Credit history has about 15% weightage.
#4: New credit enquiries
Are you applying for a new loan or a new credit card? Each enquiry will factor into your credit score. The more the enquiries, the higher the impact (negatively) on your credit score.
The number of credit enquiries has a weightage of around 15%.
#5: Your credit mix
Ideally, it would be best if you did not have multiple debt obligations at the same time. If you are like me, you’d like to be completely debt-free.
However, the CIBIL score looks at your credit mix. If you have a mix of secured and unsecured loans, long term and short term loans, then it impacts your score positively.
The weightage given to the credit mix is around 10%.
How to Improve Your CIBIL Score?
Now we get into the meaty part. How can I improve the credit score? Is it possible to jump from 550 to 750+?
The earlier section gave you an idea about what factors impact your credit score. We’ll use this information to improve your credit score.
#1: Apply for a new credit card
Since credit utilization has a 30% weightage, anything we do to improve this will have a significant impact on your score.
If you are utilizing more than 10% of your credit limit every month, I suggest that you apply for a new credit card with a higher limit.
This will instantly bring down your credit utilization %.
Pro Tip: Pick a card that has zero fees to ensure that you are not hit by unnecessary charges every year.
#2: Check for mistakes in your CIBIL report
Sometimes, your CIBIL report can contain mistakes that could bring down your score.
Make sure you buy a detailed report from CIBIL and go through the reports. If you find any mistakes, raise a dispute to get them corrected.
This is again a high-impact and low-cost option to improve your credit score.
#3: Automate your bill payments
Any payments you need to make, ensure that they are automated. This ensures that your score does not get impacted by late payment issues because you forgot to make a payment on time.
Pro Tip: Use Phonepe to automate your bill payment. Phonepe lets you pay using a credit card for free. That’s better credit score + credit card points!
#4: Pay your 100% of your bills and EMIs due
This might sound like a no-brainer.
But often, people do not realize the impact of not paying the full amount due.
The biggest culprit is often credit cards. Your credit card statement usually reflects two amounts – the total amount due and the minimum amount due.
Many people believe that it’s OK to pay the minimum amount due. Paying the minimum due attracts two things – interest charges on revolving credit and also impacts your credit score negatively.
Pay your bills in full – always!
Pro Tip: Activate the auto-debit feature. This way, the total due amount will always be debited automatically on the due date.
#5: Identify the reason why you miss your payments
A low credit score is often the result of missed payments.
Why is it that you miss payments? Are the total EMIs every month too much compared to your income?
If yes, negotiate with your lenders for either a lower interest rate or a more extended repayment period. This will lead to a lower EMI per month, and hopefully, you can manage to pay the EMIs in full without missing payments.
#6: Take insurance – health and disability
Many people run into money problems due to an unexpected financial impact like a job loss or a medical emergency.
While job loss is not always in your control, there is something you can do for a medical emergency.
If you have enough health insurance coverage, your finances will not take a big hit even if you face a medical emergency.
Pro Tip: Take a good health insurance policy with a cover of 10 lakh+. That’s tax benefit and protection at the same time for you and your family.
#7: Pay off high-interest loans with loan-interest loans
Did you know that your credit card interest rates are often 24% to 36% or more?
If you have a high credit card debt, take a personal loan (often < 20%) and use it to pay off your credit card. That’s loan arbitrage for you!
You will have a lower EMI outgo every month, and your credit history will improve.
#8: Build an emergency fund
I have talked at length about the need to build an emergency fund. If you have one, you won’t miss your EMI payments that impact your credit score.
How to Check Your CIBIL Score for Free?
The best way to check your credit history for free is directly from the CIBIL website. Click here to register for a free account to get your credit score.
However, if you want detailed reports, you’ll need to pay for a plan.
There are a few other websites which offer free CIBIL score check. However, I’d stay away from them. Once you give your details, you can expect non-stop calls, emails, and SMS with loan offers.
Now that you know your current score and steps to improve them, what’s your target CIBIL score?