7 Factors that Affect Your CIBIL Score

Being aware of your CIBIL score and what it includes is important as it shows your creditworthiness to possible lenders. This three-digit number, ranging from 300 to 900, greatly influences your ability to get loans and credit cards. Higher scores suggest better credit behaviour and can get you lower interest rates. 

Now that we have that out of the way, here are seven key factors that can impact your CIBIL score:

1. Consistent Payment History

Maintaining a flawless payment history is very important for a healthy CIBIL score.

• Timely Payments: Late payments or defaults are damaging. For instance, missing a credit card payment can reduce your score by a lot.
• Severity and Frequency: Minor and infrequent delays have lesser impact compared to major defaults.
• Recent Behaviour: More recent defaults weigh more heavily than older ones. It is important to keep accounts in good standing currently.

2. Lower Credit Utilisation Ratio is Better

The ratio of your credit usage to the credit limit available affects your score.

• Optimal Usage: It’s recommended to keep the credit utilisation ratio under 30% of your total credit limit.
• Higher Ratios: Ratios above this suggest overdependence on credit, which negatively impacts your score.
• Balanced Use: Regular but moderate use of credit cards is viewed positively, as it shows responsible credit behaviour.

3. Diversification in Credit Mix and Duration

A diverse credit portfolio and long credit history can enhance your CIBIL score.

• Variety of Credit: Having a mix of secured (like home loans) and unsecured loans (like credit cards) shows a healthy credit behaviour.
• Age of Credit: Older credit accounts contribute positively as they show experience in handling credit.
• Regular Activity: Active accounts with a long history of timely payments are beneficial for your score.

Must Read: Smart Tips To Improve Your CIBIL Score

4. Checking CIBIL Score Will Reduce Score is Definitely a Myth

Frequently checking your CIBIL score is often misunderstood as harming your credit score.

• Soft Inquiries: Checking your own CIBIL score is a soft inquiry and does not impact your credit score.
• Hard vs Soft Inquiries: Only hard inquiries by lenders, when you apply for new credit, may affect your score temporarily.
• Awareness is Key: Regularly monitoring your credit score helps you stay informed and manage your credit health effectively.

5. High Proportion of Unsecured Loans is a Sign of Risk

Having too many unsecured loans can be seen as risky by lenders, affecting your CIBIL score.

• Unsecured Loan Ratio: A higher number of unsecured loans compared to secured loans can lower your score.
• Debt Consolidation: Consolidating multiple high-interest debts into a single loan can help manage repayments better and improve your score.
• Credit Card Debt: High outstanding credit card debt is very harmful as it is considered high-risk credit.

6. Increase in Credit Limit

An increase in your credit limit, if not managed well, can affect your CIBIL score.

• Opportunity to Improve: Use the increased limit to maintain a lower utilisation ratio, which can increase your score.
• Risk of Mismanagement: However, increasing your spending to match the increased limit can backfire and decrease your score.
• Strategic Spending: Aim to spend wisely and pay off balances in full to show good credit management.

7. Loan Settlements and Write-offs

Settling a loan for less than what is owed or having a loan written off by the bank can severely impact your CIBIL score.

• Immediate Effect: These actions indicate that you have struggled to repay borrowed money, significantly dropping your score.
• Long-term Consequences: Such entries on your credit report can deter future lenders and remain on your report for several years.
• Avoid Settlements: If possible, always aim to fully repay your debts to avoid negative annotations on your credit report.

Let’s Talk about the Impact of Credit Enquiries

While not a direct factor in calculating your CIBIL score, understanding the impact of credit inquiries can provide clarity on managing your credit health effectively.

• Hard Inquiries: Each hard inquiry—when lenders check your credit score because you’ve applied for credit—can slightly lower your CIBIL score for a short period.
• Frequency Matters: If numerous inquiries are made within a short period, it might appear to lenders that you are desperately seeking credit, which can affect your score negatively.
• Educational Insight: Knowing when and why these inquiries impact your score allows you to plan major loan applications or credit line increases strategically, thus avoiding potential dips in your CIBIL score.

Conclusion

Your CIBIL score is a very important aspect of your financial profile. By effectively understanding and managing these seven factors, you can maintain or improve your credit score, enhancing your future financial opportunities. Regularly checking your CIBIL score will not reduce your score but will help you keep track of your credit health. Manage your credit smartly and consistently to build a strong financial foundation.