Naveen Nagpal (changed name), a respected business owner working in the posh area of New Delhi defaulted on his credit card payment a couple of times but never gave this a very serious thought. Yesterday, when he went to bank apply for a loan to buy his dream home, he was told that his application was denied because of his low CIBIL score. "I was shocked to know that my CIBIL credit score was around 550 and the bank rejected my loan" said Mr. Nagpal. There are many among us like Mr. Nagpal who have faced similar situation and now want to improve their credit score.
For those who are completely unfamiliar with the subject, CIBIL (Credit Information Bureau (India) Limited) is a government agency founded in 2000 which provides three digit credit ratings to individuals according to their previous repayment history of loans and credit card bills. This rating is used by several banking institutions while evaluating and approving loan applications.
For many among us who wants to improve their credit score or do not want to face such problem in the first place, it's not too late. Here is the list of steps that you may follow to improve your credit score:
Make timely payments: I know this might sound very rudimentary but there is no secondary alternative to financial discipline and maintaining a healthy credit portfolio. To avoid late payments opt for ECS facility. Try to make all the payments atleast 5 clear working days before the deadline, even 10 days if you're paying through check so that your check can get clear before the deadline and if there are any troubles with your check, you may sort them out beforehand.
Don't live on credit: too much credit will only cause you troubles. Swipe card pay later policy will not only make you pay more but will also create troubles for you as you'll have to keep in mind every instalment you'd have to pay in the month. This credit hungry behaviour also affects the credit rating of the individuals. At any point, one should not have more than two credit cards and two loans.
Use credit cards responsibly: If used irresponsibly, credit card can be the biggest curse for your CIBIL score. It is advisable to use only 30-40% of your credit card limit every month. If you have more expenditure than that, it is strongly advised to get another credit card or increase your credit limit. If your credit record is excellent, banks will happily increase your credit limit.
If you are not satisfy with your credit card bill, never opt settlement! It adversely affects your credit rating as banks report such cases as "settled" at CIBIL. A good alternative to it is closing the account by paying the outstanding balance in full. While closing do not forget to get the NOC slip from the card issuing agency. Credit Card is closed only after receiving NOC from the bank. If you do not want to pay the amount or it seem totally outrageous to accept the closing amount, you can always contact the bank ombudsman.
Secured vs unsecured loan: Secured loans where the security is an appreciating asset such as home loans improves your CIBIL score while loans on depreciating assets like car loan, personal loan negatively impact your credit rating. Always try to maintain an 80-20 ratio between your secured and unsecured loans where 80% is the secured loan fraction.
Taking guarantee for someone else's loan: One of the biggest mistake most people do is becoming the guarantor for the other's loan without giving it much thought. If the other person defaults in his loan repayment, your credit rating will also take a plunge as you're the one who took his guarantee. Don't do this unless you're really sure.
Credibility: Consistency is the key. Consistency builds credibility and credibility improves CIBIL score. A score above 750 shows you are credible enough and have paid all your dues on time. 800 and above puts you in the elite club.
These days if you are above 700 mark, you have pretty good chances for the loan approval. There is no quick remedy for reaching the mark except a disciplined financial track-record and a balanced credit portfolio. Hope the above mentioned point will help you to understand and improve your CIBIL score.