A CIBIL score is a measure of your creditworthiness which is represented in a numerical format. It ranges from 300-900 and you should always try to bring your CIBIL score closer to 900. A higher CIBIL score will put you in a better position to receive a good deal on interest for a loan or while getting a credit card. The majority of the lenders like banks and non-banking finance companies (NBFCs) prefer to sanction a loan or give a credit card to people who have a CIBIL score of 750 and above. But due to some mistakes or lack of awareness, our credit score gets negatively impacted. Building a credit score is a time-consuming process and a lot of effort is involved in it. Therefore, it is always better to avoid mistakes and be more aware and cautious while availing a loan or credit card.
As these factors affect your CIBIL score, you need to be careful and avoid a couple of mistakes. Let’s take a look at some of the mistakes that can negatively affect your CIBIL score. Your CIBIL score is made up several components and each of these components have a different weightage
Let’s take a look at all of them in detail.
|Components of CIBIL Score
|Length of credit history
|Type of Credit
Not Paying Bills on Time:
The payment history is the most important factor that has a major effect on your CIBIL score. The repayment history accounts for 35% of your CIBIL score. Therefore, it is extremely important to pay all your bills or EMIs on time. Delay in paying bills or late payment of bills can bring your CIBIL score down. In order to make sure that your CIBIL score does not take a hit, set up reminders on your phone. Another option is to set up an auto-debit facility on a scheduled date to pay your credit card bills. This way, you will not miss any credit card bill payments thereby maintaining your CIBIL score.
Maintaining a High Credit Utilisation Ratio:
A credit utilisation ratio is the percentage of the credit limit which is used by you at a given point of time. You should always maintain a low credit utilisation ratio if you want to improve your CIBIL score. This essentially means you should not max out your credit card limit and limit your usage. Several financial experts suggest that consumers should use only 30% of their total credit card limit. Your credit exposure accounts for 30% of your CIBIL score. If you have a high credit utilisation ratio, it will automatically bring your credit score down. Using the entire credit card limit indicates that you are not able to pay your bills on time and are unable to handle credit.
Availing Several Unsecured Loans:
It is important to maintain a balance of the type of the loans that you avail. Hence, it is advised to have both secured as well as unsecured loans, as it will positively affect your CIBIL score. Multiple unsecured loans lower your CIBIL score while credit options like home loans will help you boost your CIBIL score. The type of credit accounts for 10% of your CIBIL score.
Making Multiple Credit Enquiries:
If you have just started using credit cards, it is better to stick with one at a time. Owning multiple credit cards can become overwhelming as you may lose track of expenses. Also, it becomes difficult to remember the payment due date of multiple credit cards. Therefore, it is ideal to not make multiple credit inquiries at the same time as several multiple inquiries can take a hit on your CIBIL score. It also makes your look as credit hungry. Credit inquiries account for 10% of your total CIBIL score.
Having No or Low Credit History:
A credit history helps lenders understand how you have handled your credit over the years. Therefore, it is better to have a credit history. The length of the credit history accounts for 15% of your CIBIL score.
Checking Your CIBIL Report Too Often:
It is important not to check your CIBIL report regularly as it puts a dent on your cibil score. However, checking the same helps in knowing the errors in your CIBIL report thus it is advisable to check it. But try to maintain a good gap of 6 months just to be your report in a good state. A regular checking of the report can pull your score down.
Closing Old Credit Cards:
Your old credit cards could have a long credit history which you will lose if you close them. It is important to have a long credit history as it adds weightage to your credit card or loan application. Therefore, as long as it is possible, avoid closing old credit cards or credit accounts.
Spending Beyond Your Credit Card Limit:
If you spend more than 50% of your credit card limit, it signifies that you are hungry for credit and do not have a strong spending discipline. This can affect your credit score as well. For instance, if your credit limit is Rs. 1 lakh and you consistently spend more than Rs.50,000 a month on expenses, it will have a negative effect on your credit score. Make sure that you do not exceed 50% of your credit limit to protect your credit score from a negative impact.
All these are common mistakes that people might make because of lack of knowledge of what goes into a credit score. Avoiding these mistakes will help you improve your credit score.