If you are a financially conscientious individual, you may already know that your credit score is an important three digit numeric expression that is looked upon as a barometer of your financial health. But even those who know all about credit scores and credit reports tend to focus only the three-digit number that is their CIBIL score. It is important to make a constant effort to improve CIBIL score, as it will improve your chances of getting timely credit at competitive rates. But what is most important to have a complete and thorough understanding of the factors that influence your credit score. Here is a summary and respective weightage of the factors that constitute your CIBIL score:
Payment track record- 35%
Any article that you have read about how to increase CIBIL score may have always begun with the need to make timely payments on whatever line of credit you have availed of. This is simply because your payment history is the most important factor that influences your CIBIL score. If you are habitually late in making payments for a considerable stretch at the time of servicing credit, it will have a negative impact on your CIBIL score. Therefore, the first and the foremost rule that you must keep in mind while availing of any type of credit is that it is mandatory to make payments on or before the stipulated date. This is half the job done and will help you increase credit score in the long run.
Credit utilisation- 30%
People often wonder why their credit scores don’t improve even though they are making timely repayments. This is probably because of credit utilisation- another important but neglected factor that influences the credit score of an individual. Simply put, credit utilisation is the amount of credit you are using as against your total available credit. Ideally your credit utilisation should not exceed 30%. A lower utilisation rate over a time leads to a better credit history and thus an improvement in your CIBIL score. A good way to keep utilisation rate low is to keep your credit card debt under check.
Age of credit- 15%
Did you know that your oldest credit card can help you keep your credit score high? This is because the age of credit or credit history is a factor that influences your CIBIL score. The longer your credit history the better your chances of enhancing your credit score. So, even if you are not using a credit card that you had taken long back, do not make the mistake of closing it. Make the full payment on it and keep it locked away by all means, but do not relinquish it. This will not only shorten your credit history, it will also enhance your credit utilisation.
Amount and timing of new credit- 10%
Each time you make an application for a new line of credit, the prospective lender puts in a request with CIBIL to get permission to access your CIBIL report and CIBIL score. A request of this nature is called a hard inquiry. Each time there is a hard inquiry on your CIBIL report, your score comes down by a little. Too many hard inquiries over a short period proves to be detrimental to your credit health. On the one hand, it brings down your credit score and on the other projects you as being “credit-hungry”. A lender is usually wary of lending to those who come across as credit hungry individuals as it increases their risk factor. To avoid coming across as credit hungry, you must try to space out credit adequately. For instance, if you are planning to taking a big loan such as a home loan in a year, do not avail of any other new line of credit at least six months prior to it.
Mix of credit-10%
In the modern world credit is available easily. On any given day, you perhaps receive a dozen calls to avail of a personal loan or a credit card. In a moment of weakness, when funds are running low, you may even be tempted to avail of fresh line of unsecured credit. But in the long run, it turns out to be a debt trap that you find difficult to get out of. The first rule of credit is therefore to avail of it only when there is dire need for the same. Unsecured credit such as easy personal loans or an online credit card may seem convenient, but too much of unsecured credit does not augur well for your credit health. To keep your credit score high, you should have a good mix of secured and unsecured credit, as the mix of credit is another factor that influences your CIBIL score. Ideally a home loan with a credit card or two or a car loan with a credit card and a personal loan is considered a good credit mix.
Focussing on the above-mentioned credit factors that influence your CIBIL score will help in building a good credit history and lead you to increase your credit score in the long run.
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