Sunday, November 22, 2015

How is CIBIL Credit Score Determined?

Have you heard of the CIBIL Score? Most probably – Not…

CIBIL is a rating agency in India that is gaining popularity and most banks these days are reviewing your CIBIL score before approving your loans especially Home Loan. In fact, most people hear this CIBIL term when they actually apply for a loan and get shot down.

Just so you know, you need to have a CIBIL score of 750 and above to be eligible for a Home Loan. Now that you know, do you know what habits of yours can actually impact this CIBIL Score?
The purpose of this article is to help you understand that…

Before we begin:
    CIBIL is a third party agency that keeps track of your financial habits and assigns a numeric score determining your creditworthiness. This is basically CIBIL’s way of saying how good a customer you will be for a bank that is allowing you to borrow money. Higher the score, the better customer you are and higher will be your chance of getting a loan. 

Unfortunately, there are a lot of incorrect news being spread about this credit score. Contrary to popular opinion, your Age or the City you Live or your Bank Balance DOES NOT impact your CIBIL Score. In fact, even your Stock or Mutual Fund Portfolio doesn't impact your CIBIL score. 

So, what impacts my CIBIL Score?

CIBIL Tracks your daily/monthly spending habits and uses the same to arrive at a credit score. Below are the key parameters it uses to arrive at the score:

1. Making Timely Payments 

The best way to boost your CIBIL score is to make all your payments on time. This is applicable to all the credit you already have. This includes credit card outstandings and EMIs on loans. Also make sure you make other payments such as insurance premiums etc on time, though it does not fall under the credit bracket. Even a single late payment on a home loan or an unpaid outstanding on your credit card, will bring your CIBIL score tumbling down and be a blemish on your CIBIL report.

2. Volume of Credit you have Availed 

Credit is something that is easily available today. Almost every office in our country has a tea-stall outside it and there are a couple of guys from some Credit Card issuing Bank there, trying to sell you “Credit”. You probably have at least two or three credit cards that you are using simultaneously, along with a home or a vehicle loan.

While almost everyone tries to repay their loan EMI’s on time, many of us don't think too much about Credit Card Debt. If you are someone who carries forward unpaid balance from previous months onto the next month, there is a chance, this habit of yours may end up costing your CIBIL score.

The amount you owe to the folks who have lent you money, makes a large impact on your credit score. The closer you are to your credit limit, the worse its gets! Ideally you should not be using more than 30% of your total credit limit at any given time. If you are using more than 30% of your total credit limit, I would suggest you try to make quick repayments and bring it down as soon as possible.

3. The Duration you have been Using Credit 

Your “Credit history” has a huge impact on your CIBIL score. If you have availed of credit for a long time and have serviced it well, it certainly fetches you brownie points to increase your CIBIL score. A good credit history gives a prospective lender the confidence to lend to you. The longer you have been servicing credit in a satisfactory manner, the higher your CIBIL score…

4. Too much Credit in Too Little Time

Ok – if you are someone who just started on a job, I would recommend you cut-down on your impulse to sign-up for multiple credit cards right away. If you apply for too many credit cards or loans close to each other, it sets the alarm bell ringing for any bank.

Not just that, your CIBIL score takes a hit, every time you apply for a new Credit Facility (Loan or Credit Card). Every time you apply for a new credit card or loan, there is a “hard enquiry” made on your CIBIL score and CIBIL report, and this brings down your score a few notches lower each time.
You should start slow, apply for one card, use it and repay the dues properly and build a good credit history for at least 6 months before you think of signing up for another card.

5. The % of Good and Bad Debt You Are Repaying

No, I am not talking about borrowing money from Loan Sharks or that being an impact on your CIBIL score.

Actually from a banks perspective, home loans, vehicle loans and education loans fall under “Good Debt” because these are “Secured or Guaranteed” with some form of Asset that the bank can repossess if you fail to repay. Other types of Credit like Credit Cards or Personal Loans are “Unsecured” and the bank stands to lose a lot of money if you fail to repay.

So, if you have too many credit cards or personal loans, its going to have a sizeable impact on your credit score. Try to limit your usage of unsecured credit facilities and you will definitely be able to see your CIBIL score go up…

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