Financial institutions and the Reserve Bank of India (RBI) have raised the bar when it comes to the loan eligibility of borrowers. Having a strong CIBIL score [Credit Information Bureau (India) Limited], or simply put credit score is crucial to qualify for a loan with an attractive interest rate. The CIBIL score is comparable to a rank or grade rooted in how you have been servicing your credit. To earn a good CIBIL/credit score, maintaining a good credit history is imperative, because your CIBIL report will exhibit these details.
Your credit score largely impacts the scheme of things should you decide to apply for a loan. Higher your score, greater is the quantum of money you can borrow at the best interest rates. This is because when you have top-notch credit, potential leaders know you are responsible and hence you are offered the best borrowing terms.
Since your credit score and credit history and closely linked, it is wise to try keeping your credit score as high as possible. You can easily generate free credit report online. Here is what comprises your credit score, and the factors that have the largest impact there in:
At 35% of your credit score, your repayment history is the first, largest, and most critical factor affecting your credit score. Timely payment of bills (including credit cards), timely loan repayments (car loans, student loans, mortgages, other installment loans), number of late payments along with their severity and recentness – all play a role in your repayment history, because the credit score factor scrutinizes each of these aspects.
Even one default negatively impacts your credit score. Therefore, always paying your bills on time makes your credit score better than the person who seldom clears bills with in the stipulated dates. Contrarily, if your recent records show several late payments, especially exceeding 90 days on an average, your credit score plummets.
The second significant credit score factor comprising 30% of your total score is your outstanding balances/amounts owed, also referred to as your credit utilization.
To compute your credit utilization, i.e. the amount you owe to lenders, the two deciding factors are the sum total of the credit card limits sanctioned to you, and the percentage of your money you are actually using. Your credit utilization rate is calculated as the debt you carry on all your credit cards as a percentage of the credit limit on all your credit cards. Credit cards with balances that never go upwards of 30% of the limit lead to better scores.
In other words, lesser the outstanding you have on your total limit, higher will be your credit score.
This category also analyses how much you owe on home, car and other loans against the amount you originally borrowed. In credit-scoring systems, those with new loans are considered riskier versus those who are over five years into a loan. A loan takes approximately six months to mature, which means that though it may initially weaken your score, after six months of timely payments, your score will start improving.
Age of credit history
The period that you have been using credit has a 15% bearing on your credit score. The longer an account has been open the better it is.Here, individual accounts and the average age/duration of all your accounts are taken into consideration.
Hence, if you have a longer credit history age, meaning, you have been servicing debt for a longer time and are making timely repayments, your credit score is going to soar.
Each time you apply for new credit such as a credit card or loan, financial institutions (banks included) run a check on your repayment capability and overall financial health,by looking into your CIBIL report and monitoring your credit history. Every time you apply for credit, the creditor will conduct a credit check, causing your score to dip a little. Numerous such enquiries on your CIBIL report negatively impact your credit score.Credit enquiries have a 10% weightage in your credit score calculation.
Mix of credit
Having a 10% bearing on your CIBIL score is the mix of credit your profile exhibits. You will not have a good score if you have only personal loans or unsecured loans like credit cards. Credit bureaus offer the best deal if you have a healthy mix of credit –secured and unsecured loans, along with your capability to service these loans well and on time. It is considered ideal to have an assortment of various credit types like car loan, personal loan, other installment loans, credit cards, mortgage, etc. to qualify for a score higher than those with only a single type of credit.
This is because with very little credit, credit-scoring models will lack information to understand if you can manage debt responsibly.
An understanding of what goes into the evaluation of your credit score can be leveraged to identify areas in which you are lagging behind and areas where you are doing well. This will help you boost your credit score, which in turn will ensure that you get a loan at the best interest rates and with zero hassles.