Parameters that impact CIBIL credit score – A comprehensive overview

The CIBIL credit score plays a vital role in the financial lives of individuals in India. This score is a three-digit representation of the credibility of an individual and is majorly utilised by financial institutions and lenders to check the risk linked with lending funds. A strong credit score of 750 and above is necessary for availing distinct financial options like credit cards, loans, lower interest rates and processing charges on credit options, etc. Discussed here is the importance of having a good credit score and the factors that impact it in detail.

Importance of CIBIL credit score

Higher credit limits

Financial institutions most likely provide higher credit limits to those with a strong score. This endows financial flexibility and the potential to mitigate higher expenditures when the need arises. 

Favourable interest rates

Having a higher credit score usually convert into better loan rates and credit card offers. Having a strong score of 750 and above often make you come across as a low-risk credit seeker, and thus, qualify them for a preferential rate of interest. 

Easy access to credit

A good CIBIL credit score opens doors to easy credit approvals from banks and financial institutions. It instils confidence in lenders about an individual’s ability to repay borrowed funds on time.

Enhanced negotiating power

A good credit score gives individuals an upper hand while negotiating terms and conditions with lenders. It provides leverage to secure more favourable loan terms and better repayment options.

Faster loan approvals

With a good credit score, loan approvals become quicker and more streamlined. Lenders have confidence in borrowers with a proven track record of responsible credit behaviour.

Factors that affect CIBIL credit score

Credit utilisation ratio

This ratio represents the proportion of credit limit utilised by an individual. Also, Maintaining a low credit utilisation ratio, ideally below 30%, demonstrates responsible credit usage and positively affects the credit score.

Payment history

The most crucial factor influencing the credit score is the payment history. Consistently making timely payments on credit card bills and loan EMIs positively impacts the credit score.

Credit mix

Having a diverse mix of credit that involves both unsecured and secured credit options, such as auto loans, home loans, credit cards, personal loans, etc. can have a positive impact on your credit profile and score. Also, It showcases the ability to handle different types of credit responsibly.

Recent credit behaviour

However, Frequent credit inquiries and new credit accounts can indicate financial distress or an urgent need for credit, which may negatively impact the credit score. It is advisable to limit credit inquiries and new credit applications.

Length of credit history

The duration for which an individual has been using credit is also crucial. Also, A longer credit history with a good repayment track record adds positively to the credit score.

Defaults and late payments

Instances of defaults, late payments, or settlement of debts have a significant adverse impact on the credit score. Also, It is crucial to honour financial obligations and pay bills on time.

Public records

Adverse information such as bankruptcies, insolvencies, or legal judgments against an individual can have a long-lasting negative impact on the credit score. Avoiding such situations is crucial.

Overdue accounts

Overdue accounts that have been handed over to collection agencies or declared as non-performing assets can severely impact the credit score. Also, Resolving such accounts and bringing them up to date is essential.

Multiple loan applications

Making multiple loan applications within a short period can signal credit hungriness and negatively affect the credit score. It is advisable to apply for credit only when necessary.

Credit settlement

Settling debts for an amount less than the actual outstanding can damage the credit score. Also, It is advisable to repay debts in full or negotiate settlements that do not harm the credit score.

Co-signing loans

Co-signing loans for individuals with poor credit history exposes the co-signer to potential risks. Also, Any default by the primary borrower will reflect negatively on the co-signer’s credit score.

Credit age

The average age of credit accounts impacts the credit score. Also, It is beneficial to maintain older credit accounts as they demonstrate a longer credit history.

Geographic location

The geographic location of an individual may impact the credit score. However, Certain areas with higher delinquency rates may result in lower credit scores for individuals residing in those regions.

Employment stability

While not directly related to credit behaviour, a stable employment history can contribute positively to the credit score. Lenders consider it as an indicator of financial stability.

Credit inquiries

Hard inquiries made by lenders when assessing credit applications can slightly lower the credit score. Also, It is advisable to limit the number of credit inquiries.

Credit monitoring

Regularly monitoring credit reports and rectifying any errors or discrepancies can help maintain a good credit score. Also, Timely reporting of inaccuracies ensures a fair representation of creditworthiness. Like online FD calculators that allow you to compute the overall interest earning on fixed deposits, online credit score calculators work in the same fashion. Using the online credit score calculator, you can understand your credit standing and accordingly take measures to improve or maintain it. 

Credit education

Attending financial literacy programs or taking steps to improve credit knowledge can positively impact the credit score. Also, It helps in making informed financial decisions and managing credit responsibly.

Credit utilisation frequency

Frequent utilisation of available credit can indicate credit dependency. It is important to use credit sparingly and only when necessary to maintain a healthy credit score.

Loan closure

Closing credit accounts can impact the credit score, especially if they have a long and positive repayment history. Also, It is advisable to keep old accounts open and active, as they contribute to a higher credit score.

Financial discipline

Practising overall financial discipline, including budgeting, saving, and responsible spending, contributes to a positive credit score. Also, Sound financial habits demonstrate an individual’s ability to manage credit responsibly.

In conclusion, maintaining a good CIBIL credit score is of utmost importance for individuals in India. It not only facilitates easy access to credit but also opens doors to favourable interest rates, higher credit limits, and enhanced financial opportunities. Also, By understanding and actively managing the factors that impact the credit score, individuals can take control of their financial well-being. It is crucial to practice responsible credit behaviour, pay bills on time, and maintain a diverse credit mix. By doing so, individuals can reap the benefits of a good credit score, such as better loan terms, lower interest rates, and increased financial flexibility.