A credit score acts as a measurement of an individual's consistent repayment of debts obtained from lenders such as banks. When borrowing money, the repayment information is sent to credit bureaus to calculate a credit score. A higher credit score improves the chances of securing loans with favorable terms by reflecting the individual's payment history and credit data from various financial institutions and loan types.
In India, there are four authorized credit information companies regulated by the Reserve Bank of India: Credit Information Bureau (India) Limited (CIBIL), Experian, Equifax, and Highmark. The CIBIL credit score ranges from 300 to 900, with 900 indicating the most advantageous credit rating.
Enhancing your CIBIL score, also known as your credit score, is crucial for securing credit on advantageous terms. These favorable terms include loans with reduced interest rates and minimal documentation requirements.
“Maintaining a healthy credit score is essential for borrowers to ensure the best interest rates and loan terms on various credit products. To build and improve the credit score, prioritising timely repayment of any existing credit before or by the due date is important, as the DPD (Days Past Dues) are reported daily. While regular monitoring of the credit utilisation is paramount, creditors should also keep credit card limits and usage in check. Simultaneously, borrowers should avoid submitting multiple loan applications to different lenders as this pattern can be flagged by the credit bureaus and may hamper their credit score. Additionally, a mix of secured and unsecured credit is also recommended for developing a strong credit profile," said Shruti Aggarwal, Co-Founder, Stashfin.
Steps to improve your credit score or CIBIL score
Reduce Credit Utilisation Ratio: Aim to keep your credit card balances low compared to your credit limit. Ideally, try to keep your credit utilisation ratio below 30%. Paying off existing debts can help lower this ratio.
Bill Payments: Your payment history plays a crucial role in determining your credit score. Make sure to pay all bills, including credit card payments, EMIs, and utilities, on time. Setting up automatic payments or reminders can help you maintain a good track record.
Limit New Credit Applications: Applying for new credit leads to a hard inquiry, temporarily lowering your credit score. Avoid unnecessary credit applications, especially if you plan to take out a significant loan in the near future.
Diversify Credit Mix: Having a variety of credit accounts, such as credit cards, loans, and mortgages, can have a positive impact on your credit score. However, only take on credit that you can handle responsibly.
Regularly monitor your credit score by utilizing free credit score monitoring services offered by banks and credit bureaus to track your progress.
Address any negative items on your credit report, such as late payments or defaults, by working towards resolving them through negotiation with creditors or setting up payment plans.
Keep old accounts open to maintain a longer credit history and potentially prevent a decrease in your score caused by closing them.
If you are struggling to improve your credit score independently, consider seeking assistance from a credit counselling agency or financial advisor for personalized advice and guidance.