- HOW IT WORKS?
- Credit Score & Report
- Credit Bureaus
Have you ever wondered how people get an insane about of credit limit on their credit card or an astonishingly large amount of loan? How do banks decide the limit on credit cards or the quantum of loan to be given to a person?
Among many other factors, one critical consideration for banks to take this decision is the credit score of an individual.
What is a Credit Score?
A credit score is an arithmetic statement of your creditworthiness. It contains details of the credit that you have obtained throughout the years. A credit score also takes into account your past credit and how you have repaid it. It will show if you have missed making any payments or you whether having settled your loan.
Therefore, it is an important factor in determining whether your loan application will be approved or not.
Credit Information Bureau, (India) Limited (CIBIL) is a credit information company, which is first of its kind, and was established in August 2000. It collects and maintains data on individual payments relating to loans and credit cards. This data is submitted by associated banks and financial institutions to CIBIL on a monthly basis.
By this information, a Credit Information Report (CIR) or credit score is generated and provided to the banks and financial institutions which will help them evaluate and approve loans and credit card limits. A high score means good creditworthiness and a low score means low creditworthiness.
India has 4 Credit Information Companies which provide credit scores.
These organisations have been approved by the Reserve Bank of India (RBI), to collect and analyse credit information. Among these, CIBIL is the first and oldest company for credit information.
Importance of Credit score
A credit score is a three-digit number obtained from your credit history. So if you are planning to take a home loan, car loan or any other type of loan, make sure that your creditworthiness is high. Since this will determine the rate of interest that the bank is willing to give you a loan at. If you have a good CIBIL score than banks may charge a lower interest rate. But if your CIBIL score is low than banks charge a higher rate of interest, since you are considered to be a risky borrower. Banks may even deny you a loan if your score isn’t enough.
When you apply for any loan or credit card to a bank or a financial institution, it will first check your credit score to ensure whether you apply to avail the loan.
If your score does not meet their expectations, then the lender may reject your application. But if it is high, then they might evaluate other factors before accepting the application.
The higher the score better are the chances of getting your application accepted.
CreditSeva will help you to generate your credit report and credit score in a few minutes and help you manage your finances better.
What influences your CIBIL score?
To keep a healthy credit score, it is very important that we understand what influences CIBIL score.
What influences your credit score is not the same as what influences another person’s since everyone uses a credit differently and has different accounts and histories.
The following factors may, however, impact your credit score:
- Payment history: Your payment history is the most important factor that influences your CIBIL score. Paying your instalments and bills on time will help you avoid late fees and also get a better score. It shows the lenders that you have a record of paying on time, consistently. A record of late or missing payments can lower your score.
- Age and type of credit: If your credit period is lengthy then, lenders have more information to access your creditworthiness. It is also an indication that you are managing your credit well.Also, a healthy combination of debt like credit cards, home loans and auto loans can impact your score. Only having one debt will not improve your score.
- Percentage of credit limit used: You should focus on keeping the balance under 30% of your credit limit. Having a high debt balance can affect your score.
- Credit behaviour and inquires: Every time you make an application for loan or credit card, an inquiry is placed on your credit report. Several inquiries, during a short period, can influence your score.
- Accounts in use: if you have too many open accounts, it can have a negative impact on your score, whether you are using them or not.
All these factors have points, which make up your credit score. If you manage your credit well, your score will be excellent. Gender, marital status, age, occupation, salary, race, creed, bank balances, debit or prepaid cards do not affect your CIBIL score.
CIBIL score scale
Your CIBIL score can range from anywhere between 300 to 900, 300 being the lowest and 900 being the highest.
An updated version CIBIL Score 2.0 is designed to keep in mind the current changes in the customer profiles and credit data. According to the new updated version, a risk index score range for individuals who have a credit history of fewer than six months, is introduced. These were categorised as No History individuals in the earlier version.
You can interpret your score using the following information
- NA or NH: If your score is NA/NH it means that you have no credit history which has been reported or has only been enquired upon. It could also mean that you have a credit history, but it has not been reported before any enquiry in the last 24 months.
- 1-5: This is the new range of the index that is introduced by CIBIL for individuals of credit history of fewer than six months. 1-2 is high risk, three medium risks and 4-5 is low risk.
- 300-900: If you have a credit history of more than six months in the last 24 months, then your score will come in this range. If you have a higher score, than your loan application is less likely to get rejected and get a competitive rate of interest from most banks. A low score would mean you might either have to pay a high rate of interest and it would be difficult to obtain loans from financial institutions and banks.
If you have your credit score in hand, you can take make plans for future finances. You are also in a great position to avail new forms of credit at best possible rates.
What is loan settlement?
In your credit report, an important element is the Accounts section. This section gives information on all the loans and credit cards that you have taken. It contains the details of all the credit given to you, the current balance, payments, type of credit, loan amount and the like. It also shows the status of your account whether it is closed, settled or written off.
Let us see what each of them mean:
- Closed: If the status adjacent to your loan shows closed, it means that you have fully paid the loan amount and the bank has reported this account as closed to CIBIL.
- Settled: If the status shows Settled, it means that you have partly paid the amount of loan or credit card and the bank has agreed to settle your loan for an amount less than the original amount. The status settled is reported by the lender since they are bearing the loss. This status may make it difficult for you to get loans.
- Written off: If you have not paid your outstanding dues on loan or credit card for more than 180 days, then the lender reports a status of written off to CIBIL. This status may damage your credit score, and it would be very difficult to avail a loan or credit card.
So if your account’s status shows either settled or written off, then it is going to adversely affect your credit score, which in turn will make it difficult to avail a loan or credit card.
Improving CIBIL Score after Settlement
When a loan is settled or written off, it is viewed as negative credit behaviour of an individual. CIBIL holds this information for seven years. During this period if you want to avail a loan or credit card facility, it is going to be a hard task, since lenders will look at your past credit behaviour before offering you a loan.
The common worry after settling the loan/credit card amount is that whether you can improve your CIBIL score or not? Yes, there is a solution for it. But this is going to take time. Your score cannot be fixed overnight or instantly. Once you start behaving responsibly towards your credit, gradually your score will start to improve. You need to be committed and patient towards your goal.
Following are some points that you can keep in mind to improve your score after settlement
- Change status from ‘settled’ to ‘closed’: It is advisable to convert your account status from settled to closed by paying the full amount due if you have partly paid and settled the loan or credit card amount. You must talk to your lender and come to a mutually agreed amount, based on your financial condition that will permit to change status from settled to closed.
- Make payments in time: Since your payment record is an important factor in calculating your credit score, you should make all your further payments regularly and fully to improve your score. This will greatly impact your score, although you might have to limit your spending, the result will be worth it.
- Pay off your dues: Any outstanding amount on your loan or credit card can have a negative impact. It is better to talk to your lenders and jointly agree on an amount and pay it off. Delaying payment will only increase the amount of interest, and you may end up paying larger amounts. Your credit score would decrease if you postpone payment.
- Do not surpass 50% of your credit limit: You should not exceed 50% of the credit limit given to you. So suppose your credit card limit is 1, 00,000 for a month, then you should not spend more than Rs. 50,000 for the month. If you expend more, then you will be seen as hungry for credit, having no spending discipline. This will negatively influence your score.
- Keep using credit: Many people stop using credit cards to avoid further damage to their credit score. This is a wrong practise. You should continue using it and show that you have started behaving responsibly. To restore your credit score you need to use credit. The absence of credit activity will lead to a decrease in your score. So you need to use a small amount of credit from your limit and pay your balance in full for every single month.
- The right mix of loans: It is advisable to select a right mix of secured and unsecured loans. Secured loans are home loans; they improve the CIBIL score as they create long term appreciating assets. Unsecured loans are personal loans, credit cards, auto loans, which negatively influence the score. So your portfolio should ideally have 80% secured and 20% unsecured loans. Work your way to this ratio, and you will see a great impact on your credit score.
It will take a minimum of 12-18 months to improve your score after settlement. So if you are planning a financial expenditure shortly, this will need a loan, see that you study your credit report comprehensively and take immediate steps towards its recovery.
Credit report and credit scores change according to your credit behaviour. Once you have started paying your all the unpaid dues and instalments regularly your score is bound to improve gradually.
Maintaining a healthy score
Getting a good score is difficult but maintaining it is tougher. But with these simple guidelines, you can maintain your score like a professional.
By inculcating certain habits and strictly adhering to them, you can keep your perfect score.
Following guidelines will assist you:
- Regularly check your credit report: It is a good practice to regularly check your credit report since it will give you information about two things. Firstly, it will show you the loan or credit card where delayed payments exist, which are bringing your score down. Secondly, it will give you information about any enquiry details that have been made by lenders. If there is any negative information, then you can approach the bank and CIBIL to get it rectified.
- The lower frequency of applications: Keep the number of applications for loan or credit card low. Every time you apply for a loan or a credit card, an enquiry is made by the lender, and it appears in your credit report. This information would lower your credit score since it shows that you are credit hungry.
- Pay your dues on time: You need to pay your outstanding, whether loan or credit card, on time regularly. You should make sure that you, not only pay the minimum amount but the entire amount due. You need to start becoming prompt in paying your EMIs.
- Avoid settling loans and credit cards: Sometimes people settle a number of loans or credit cards since they are unable to service them. It means that they pay lower than the original amount and close the debt. This information is reflected in your credit report, which will have a negative impact on your credit score.
- Borrow only when you need: You should only borrow when you need. Too much borrowing shows that you are credit greedy, which is likely to bring down your score. Also, don’t avoid coming close to your credit card limits.
- Continue using your credit card wisely: You need to keep using your old credit cards, but responsibly, since they show your credit history. It will lengthen your credit history and boost your credit score especially if you have an excellent record of on-time and full payments. Some people close their cards if they are not able to pay them off. You are closing avenues of creating a credit history. The ideal thing is to take the card and use it wisely.
- Credit mix: If you have too many unsecured loans (auto, credit card or personal), it might impact your credit score. Try a mix of both, secured (home loans) and unsecured to enhance your score.
Taking the above guidelines into consideration can make you more credit confident.
A poor score will not haunt you forever. Once you start showing a more reasonable behaviour towards your credit, your score is bound to improve gradually. Keep the above guidelines in mind while managing your credit. Bear in mind that there is no quick fix solution to improving your credit score. A good score can get you quick access to a loan or credit card. You need to inculcate the credit improvement habits to get a hassle free credit and make a positive impression on the lender.
By signing up at CreditSeva, we will help you analyse and improve your credit health, and by taking our suggestions, you will be eligible for new credit cards and any loans from various banks.
Related useful articles:
Improve CIBIL Score after Car Loan Settlement
Improve CIBIL Score after Education Loan Settlement
Improve CIBIL Score after Personal Loan Settlement
Improve CIBIL Score after Home Loan Settlement
- TransUnion CIBIL
- CIBIL Credit Score
- CIBIL Credit Report
- Free CIBIL Score & Report
- How to Check CIBIL Score
- How to Improve CIBIL Score
- How to Pay Off Credit Card Debt
- Bad CIBIL Credit Score
- CIBIL Score Calculation
- Can I Get a Loan with a Credit Score of 550
- CIBIL Score Myths
- CIBIL Grievance Redressal Process
- CIBIL Report Error
- CIBIL Score for Car Loan
- CIBIL Score for Credit Card
- CIBIL Score for Home Loan
- CIBIL Score for Personal Loan
- How to Get Personal Loan with Low CIBIL Score
- CIBIL Score for Business Loan
- Can I Get Car Loan with Low CIBIL Score?
- CIBIL Credit Monitoring Services
- Link between MCLR and CIBIL Score
- Credit Score Important at Retirement?
- Does Personal Loan & Credit Card help Improve Credit score?
- Factors That Deciding Your Credit Score
- Factors Affecting CIBIL Score
- Top 12 Interesting Facts about CIBIL Score
- CIBIL FAQs
- Good Habits That Help You Maintain Good CIBIL Score
- Minimum Payments Affect Your Credit Score?
- How to Read Your Credit Report
- Impact of Late Payment on CIBIL Score
- Tips to Increase CIBIL Score
- Loan Settlement Affects CIBIL Score
- Low Credit Limit despite a High Income
- Loan Approval Process On CIBIL Score
- Importance of CIBIL Score for Financial Objectives
- Importance of CIBIL Report
- Missing One Payment Affect CIBIL Score
- Small Mistakes That Can Hurt CIBIL Score
- Personal Loan for CIBIL Defaulters
- Reason for Loan Rejection Other than CIBIL Credit Score
- How to Resolve CIBIL Report Errors
- Skipping Bill Payments can Affect Your CIBIL Score
- Solutions for Your CIBIL Credit Report Problems
- Test Your Financial Fitness
- Things That Don’t Show up on Your Credit Report
- CIBIL Consultant
- CIBIL vs Experian vs Equifax vs CRIF High Mark
- Different Types of Credit Can Boost Your CIBIL score
- Having a High CIBIL Score can get you a low rate of interest
- How a Good CIBIL Score Can Improve Your Job Prospects
- How Credit Information is Important for a New Borrower
- How Long It Takes To Improve CIBIL Score
- Tips to Improve CIBIL Score
- Important Factors for CIBIL Score improvement
- Co-Signing a Home Loan? Proceed with Caution
- What is DPD in CIBIL Report?
- How to Remove Name from CIBIL after Settlement?
- Ways to Remove Name from CIBIL Defaulter List
- CIBIL Dispute
- How to Improve CIBIL Score after Personal Loan Settlement?
- How to Improve CIBIL Score after Home Loan Settlement?
- How to Improve CIBIL Score after Education Loan Settlement?
- How to Improve CIBIL Score after Car Loan Settlement?
- How to check your CIBIL Score with your PAN Card?
- How to Improve CIBIL Score after Settlement?
- How to Improve CIBIL Score Immediately?
- Car Loan for CIBIL Defaulters
- CIBIL Score for SBI Bank Credit Card
- Credit Card for CIBIL Defaulters
- Home Loan for CIBIL Defaulters
- Loan without CIBIL Verification