What is CIBIL Score and How can you Improve it?

Improve CIBIL Score

How often have we applied for a credit card only to be informed by the bank that the application has been rejected? Banks generally do not give the exact reasons for the rejections, but it is usually because of a low/bad CIBIL score. What is the CIBIL score and how to improve CIBIL score will be our topic of discussion in this article.

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What is a CIBIL score?

A CIBIL score is a three-digit value (between 300 and 900) assigned by CIBIL (Credit Information Bureau (India) Limited) to every borrower. This score represents the creditworthiness of the borrower, depending on various factors.

  1. The repayment record of the borrower
  2. The total loan outstanding in the borrower’s various loan accounts
  3. The age of the borrowings
  4. The number of credit inquiries
  5. Secured Loans to Unsecured Loans ratio

The Reserve Bank of India has authorized CIBIL to collect information on all the above-listed factors from member banks and financial institutions. CIBIL has a unique algorithm that calculates your score based on the information supplied by the banks. This score is in the range of 300 to 900 and is classified as follows.

  1. 300 to 549 – Poor
  2. 550 to 649 – Fair
  3. 650 to 749 – Good
  4. 750 to 900 – Excellent

Besides, there is one more category for people who do not have any borrowing history. Under such circumstances, the CIBIL score is -1 or NA/NH.

Let us discuss the factors that influence your CIBIL score and simultaneously see how to improve CIBIL score.

Factors affecting your CIBIL score and How to improve it

  • Track Record of Past Repayments
  • All member banks and financial institutions report the repayment record of every borrower to CIBIL monthly. So, even if there is a default in the repayment of a single EMI, it reflects in the CIBIL statement, affecting your CIBIL score. Likewise, delayed payments, especially recent occurrences, can affect your CIBIL scores. These instances show that your loan repayments are irregular.

    Solution - So, repaying your loan installments and credit card bills on time helps improve your CIBIL score.

  • Records of previous settlements, defaults, and write-offs
  • Previous loan settlements, compromises, and write-offs affect your CIBIL score adversely. Similarly, defaults leading to legal actions and recovery proceedings adversely affect your CIBIL scores. The disturbing aspect is that such records remain on the CIBIL report for ten years after the incident. Such instances indicate that you do not have the capacity or the intention to repay the loan.

    Solution - If you have any defaults, it is better to adjust the loan fully without going for a compromise or settlement offer. If there is a write-off, we advise you to contact the lender and adjust the dues in full. Partial payments and settlements are not going to help you in this matter.

  • Outstanding loan balances and age of credit
  • Ideally, your outstanding loan balances should reduce every month, provided you do not avail of new loans. So, if your repayments are on time, the outstanding balances decrease accordingly. First, the CIBIL algorithm notes the loan balance movements to determine your score. Secondly, the older your credit history, the better your CIBIL score.

    Solution – Prompt repayment of the loans can help you improve your CIBIL scores. If you avail of new loans, the balance increases. However, the downside is that repaying old loans can reduce your credit age, affecting your CIBIL score. But, this factor does not count much.

  • The ratio of secured and unsecured loans
  • All loans can be classified under two categories, depending on the collateral you provide for the loan. The secured loans are those where adequate collaterals are available. Such loans include home loans, auto loans, mortgage loans, etc. Unsecured loans are those without collateral. They include personal loans, P2P lending, credit cards, etc. The CIBIL statement consists of both these categories. .

    Solution – A higher ratio of secured vs. unsecured loans is preferable. So, if you have more secured loans with a regular repayment record, it is beneficial. On the other hand, a higher unsecured loan balance is viewed negatively. Therefore, it is better to restrict unsecured borrowings, especially credit card debt, to less than 30% of the overall limit. In addition, it can help improve your CIBIL score.

  • Loan inquiries
  • Banks and financial institutions, members of CIBIL, check the CIBIL score and history for each loan application. Every inquiry made by these organizations reduces your CIBIL score by a specified amount, irrespective of whether the banks sanction the loan or not. So, a high number of inquiries indicate that your financial health is not good, and you are seeking multiple financial assistance options.

    Solution – It is advisable not to apply for loans and credit cards unless you need them.

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How do banks view your CIBIL report?

The CIBIL report provides immediate and accurate information to the lender about the various loans you have availed from different institutions. It also includes detailed information on your repayment history. Thus, it is easier for the banks to determine your total obligations every month. Accordingly, they can calculate your repayment capacity. Therefore, it is a critical aspect of loan processing.

Besides, the CIBIL report also shows your willingness or intentions to repay the loans.

What score is ideal for a bank loan?

It depends on the type of loan you apply for. Banks have high thresholds for unsecured loans like personal loans and credit cards, with the minimum CIBIL score stipulation at around 750. Home loans and other secured loans do not require such high CIBIL scores. A score of over 650 is usually considered good. Banks also consider CIBIL scores between 550 and 650, depending on the borrower’s track record with the specific bank. Borrowers with CIBIL scores below 550 are generally not considered for loans.

What can people with low CIBIL scores do?

People with low CIBIL scores should investigate the reasons for their low scores and improve on them. We have discussed how to improve CIBIL score in this article. In addition, if banks do not sanction their loans, they can approach other avenues like P2P lending.

Such people can improve their income levels using the various paise kamane wale apps on the internet. A good CIBIL score indicates that your loans, savings, and investments are in order

Final Thoughts

Every person should know their CIBIL score. Besides, they should go through the CIBIL report every month because it provides information on their repayment track record and credit history. The CIBIL report can also provide details of misuse of your identity credentials. We will discuss more of that in a subsequent article because this article concentrates on what a CIBIL score is and how to improve CIBIL score.

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