How to improve your CIBIL Score? The best practices.

‘How to improve your CIBIL Score? The best practices’ is a part of the series where we are learning some of the banking terms that are essential for personal money management.

In case you apply for a loan, be it a personal loan, consumer-durable loans, an auto loan, or a home loan, your lender checks your CIBIL Score before approving the loan. In most of the cases, a person having a CIBIL Score of 750 or higher gets faster loan approval, and his or her loan rejection chance is low. Even if you are applying for a credit card, your lender checks your CIBIL Score. Thus, it is essential to keep your CIBIL Score up to get faster loan approvals and saving a considerable amount of money. In this lesson, we will learn the key points or the best practices to improve your CIBIL Score.

You can check out our previous lessons on CIBIL Score and check it online for free to have a better idea if you are new to the topic.

Factors affecting your CIBIL Score

In the previous lesson, we have already discussed that CIBIL Score is a Score between 300 and 900 that banks or other financial institutions look into before approving a loan. The higher the number, the better. Generally, lenders prefer a CIBIL Score of 750 or higher. 

Credit Bureaus in India, like TransUnion CIBIL, takes into account some factors before assigning a CIBIL Score to you. Therefore, you must know these points first.

CIBIL Score weightage
CIBIL Score weightage

Analysis

The most significant factor affecting your CIBIL Score is your payment history. People generally don’t take it seriously. However, you should be careful to repay your EMIs or credit card bills diligently. You should know that mere 30-day delinquency can bring down your CIBIL Score by 100 points.

Credit Exposure is nothing but a ratio that says how much credit you are using in proportionate to your credit limit. Once your credit exposure ratio goes up, your CIBIL Score points start to go down.

Credit type is another critical parameter to assign a score to your CIBIL Score. There are two types of Credit: Secured and Unsecured. For instance, secured loans (e.g., home loans, auto loans, etc.) are backed by collateral while unsecured loans (e.g., personal loans, credit card loans, etc.) are not. Thus, a high percentage of unsecured loans can reduce your CIBIL Score.

At the same time, credit duration refers to the number of years that have passed since you took your first loan. If your credit duration is short, your CIBIL Score may not be a significant number to impress your lenders.

Other factors include hard inquiries (multiple credit inquiries in a short span), inaccurate information on CIBIL report, defaults in joint accounts, the default of a loan where you are a guarantor, and credit behavior (lender’s experience with the customer), etc.

These are some of the factors that affect your CIBIL Score in either way. Now, let’s see the steps to improve your CIBIL Score.

Steps to Improve your CIBIL Score

REPAY YOUR LOAN ON TIME

Repaying your loan on time is the single most factor that you have to consider to improve your CIBIL Score. You may have some financial problems to pay your monthly loan installments but try not to miss it. You can take loans from your friends or family members to repay the loan on time. In the worst case, you may even have to take a loan from a money lender to repay your loan installments, but that may be a good deal anyway. Try not to miss even a single EMI. 

LIMIT YOUR CREDIT EXPOSURE

Most people take a credit card and use it up or exhaust it in one go. That’s a bad idea. Most of them think using a 100% credit limit and repaying it on time may increase their CIBIL Score. That’s not true. Credit Exposure is also known as the ‘credit utilization ratio,’ Its ideal range is 30% or below. Thus, if your credit card limit is Rs 1,00,000, you should never use it above Rs 30,000. A higher credit utilization ratio indicates that you are struggling with your money management and are crazy about taking loans and using it. Think about it deeply.

HAVE A GOOD MIX OF CREDIT TYPE

As we have studied earlier in the post, there are two types of credit: secured and unsecured. In a secured loan, the loan is backed by collateral, whereas it is not so in an unsecured loan. The CIBIL Bureau looks into your credit mix in detail. Therefore, a higher percentage of secured loans with a lowered portion of unsecured loans is preferrable and improves your Score drastically. However, if your loan portfolio has a higher rate of unsecured loans, then your CIBIL Score is bound to go down.

START YOUR CREDIT JOURNEY EARLY TO IMPROVE YOUR CIBIL SCORE

It sounds odd that I am telling you to start your credit journey at an early age. My point is that to improve your CIBIL Score, you have to take credit, and there is no other way. If you don’t have any credit history, then how will the Credit Bureau know that either you are a good borrower or not. Therefore, to improve your Score, you can take small loans that you can comfortably repay and maintain a clear history along the way. Starting at an early stage means your credit duration will get longer, and that is a plus point for you. The Credit Bureau observes that you are taking loans and repaying it diligently over a long time. That means you have the capacity and eagerness to repay your loans and have a long track record. That’s what your lenders wish.

I am not advocating to take loans at an early stage of your life for your lifestyle expenses. However, it is essential to improve your CIBIL Score. No previous loans mean no track record, and your lenders don’t know you. On the other hand, you can apply for a credit card and purchase your essentials using it. You must pay your credit card bills on time and never use 30% of its maximum limit. That is another way to improve your CIBIL Score. Today, there are also a lot of online platforms that offer you small credits. Take it for your essential purchases and repay it diligently.

STOP MAKING MULTIPLE INQUIRIES IN A SHORT SPAN

Sometimes, when people are in an urgent need of money, they apply it in multiple banks simultaneously over a short period. However, that becomes a negative sign of your creditworthiness. The CIBIL thinks that you are in an urgent need and desperately looking for a loan. This type of attitude or negligence reduces your CIBIL Score. Thus, if you need a mortgage, then don’t apply it in multiple banks. The best practice is to check it online to see the lender who can approve you at a lower interest rate. The details about document requirements, policies, downpayment requirements, policies, etc. are readily available online. Analyze the best one and apply for the loan. Therefore, the best practice is not to make frequent inquires in a short span.

[Remember: The bank does not give loan to those who need it desperately, but to people who don’t need it]

VERIFY YOUR DETAILS IN CIBIL REPORT

After getting your CIBIL report, you should have a closer look at it. There may be errors in your PAN number, your account numbers, your income. Anything can go wrong. Once you get what has gone wrong, raise a dispute with your Credit Bureau to correct it immediately. They do it for free of cost. This incorrect information or out-dated information can hurt your Score. Therefore, being vigilant comes with a good CIBIL Score.

CHECK OUT DEFAULTS IN JOINT ACCOUNTS

Joint loan accounts can become a headache if your partner becomes careless. Sometimes, a joint loan account has a privilege; for example, getting faster loan approval. However, it becomes a headache and your CIBIL Score nosedives when your partner defaults. Your Score comes down along with his or her Score. That becomes a nightmare. For example, suppose you have taken a joint home loan along with your siblings. Once they start defaulting or skips installments, it becomes hard for you to retain your CIBIL Score. Therefore, it is always better to play safe and stay away from such joint loans.

STAY AWAY FROM BEING A GUARANTOR 

It is not unusual that someone familiar meets you at a bank and request you to sign on his loan processing documents as a guarantor. It is a common practice in a rural setup. People do it often. However, it is not a good practice, and you must be careful before signing those loan processing documents. Once he or she defaults, it is you who is responsible for repaying the remaining loan amount. Once you disagree with repaying or delaying your payment, your CIBIL Score plunges. Therefore, it is Ok to say a big ‘NO’ if you are unsure about the person. I am not saying that you should not help others, but it is a safe approach in most of the cases.

AVOID LOAN SETTLEMENTS

Suppose you had a loan, that you are unable to repay now due to some factor. The factors may be that you have become jobless, have developed a long term illness, filed bankruptcy or any other reason. However, the bank will not sit its legs crossed. It has its loan recovery mechanism or might have outsourced it. In either case, they will talk with you for a one-time settlement. You settled with a one-time payment, but remember the lender will forward it to the CIBIL Bureau, recording it as a ‘SETTLED’ account. That way, your CIBIL Score will fall drastically.

[Note: A ‘settled account’ is different from a ‘closed account.’ Once you repay all your loan installments without discrepancies, it becomes a ‘closed account.’ On the other hand, your inability to repay your existing loans will force you towards a ‘settled account.]

HOW TO IMPROVE YOUR CIBIL SCORE? – A closing thought

A lender, be it a human being or an organization, is a lender. They prefer to approve loans to those who can repay it with the accrued interest. Once you begin to deal with them and refund as per the agreement, without any discrepancies, you become their premium customer. They would like to offer you loans even if you don’t need it. Thus, building a complex structure seems more natural than building confidence. The above phrase is correct in life as well as in the world of finance too.

There is an old saying that says, ‘Cut your coat according to your cloth.’ Most of the time, we go beyond it and overburden ourselves with loans, credit cards, and EMIs. However, such activities seem reasonable for today’s generation. However, this is harmful both for your financial life and CIBIL Score. Stay informed, stay safe.

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I need your comments in the form of opinions and suggestions to add more value to your life.

Thanks and regards,

finguru@finlessons.com

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