How to take care of your CIBIL score for better financial planning

28 Jan 2022 , 02:08 PM

Thousands of Indians are now suffering from poor credit scores and cannot tackle these circumstances due to a lack of knowledge. Surely average person has likely heard a lot about the CIBIL score but has no idea what it means or how significant it is. People new to credit must be well-aware that their credit score is the foundation of their financial wellness.

An Individual's credit score can lead to financial tragedy. Individuals with solid credit scores should also regularly monitor their credit reports since their credit score might drop due to incorrect information submitted to credit bureaus. Therefore, one should first learn about CIBIL, and then about CIBIL score and how to improve it to avoid future trouble while getting credit.

What is a CIBIL score?
CIBIL (Credit Information Bureau (India) Limited), currently known as TransUnion CIBIL, is a credit rating firm that collects, manages, and generates credit ratings for consumers worldwide. TransUnion CIBIL was founded in 2000 and has 2,400 members, including financial institutions, NBFCs, banks, and home financing businesses. TransUnion CIBIL is a credit agency that manages the credit histories of over 550 million customers and organizations.

Your CIBIL Score is a number between 300—850 that depicts your financial health. The Better the score, the great a borrower looks to the possible loan lender. Not only a high credit score will assist you in securing a loan, but it’ll also ease the doors to avail of a loan at rock bottom interest rates. Poor credit might make it harder for you to get a home loan, car loan, or credit card. It also can cause you to have higher interest rates, ultimately making your loan expensive to repay.

Here are a few essential credit habits you should keep in mind while doing financial planning and maintaining a favorable credit profile:

• Plan your financial goals and priorities - You must carefully plan your financial goals and analyze your credit possibilities. Strive to keep your income to EMI ratio under 30% (a basic estimate of how much of your monthly income goes toward EMIs and credit card payments). And just because you have credit doesn't mean you should utilize it. Apply for additional credit only when you need it. This type of preparation is essential for accomplishing your financial objectives while keeping a good credit score.
• Budget and save - Our parents always told us to save a lot of money when we were youngsters. That counsel remains true today. Budget your monthly costs, anticipated bills, loan obligations, and repayments, and set aside money for unexpected needs. While we live in an age when we have instant access to credit, we should be prepared for an unexpected turn of circumstances that might put us in financial distress. Begin saving gently yet steadily. A good rule of thumb is to have three months' worth of money tucked aside as an emergency fund so that you can get through the tough times with ease. Set aside a set amount of money each month for this emergency fund.
• Track your expenses - Keeping track of how much you earn and how much you spend on a weekly or monthly basis (also known as your income to expense ratio) may help you analyze your spending, understand what you can and can't avoid, and better manage your finances. To correctly work your costs, you can keep a journal, use diligent excel files and programmers, or use a personal finance application. While EMIs and loan repayments are unavoidable costs, ordering takeout is.
• Stay credit-conscious - Do you regularly maintain track of your finances by reviewing your bank statements and investing portfolio? In the same way, responsible credit consumers keep track of their credit profiles by checking their CIBIL Scores and Reports regularly. This allows them to keep track of their credit profiles, card spending, loan amounts, credit behavior, and credit information given with CIBIL by their lenders and banks. It also assists customers in better understanding their loan eligibility so that they may obtain credit when they require it.
• Check Your Credit Report- Regularly reviewing your credit reports is a good idea since it will reveal two essential things to your credit score. The first is a loan or credit card with defaults or late payments that have lowered your credit score. The information documented in the credit report is the second thing it will tell you. This aids in the repair of credit scores because if you discover insufficient information on the news, such as defaults or payment delays, you can always contact the bank and CIBIL to rectify the problem.
• Note Your Credit Utilization Ratio - Make sure you're not using your credit card for everything. Maintain a credit usage ratio of 30 percent or lower. You will see a good influence on your CIBIL score if you do this.
• Pay your loans - If there are any debts that you have been postponing payments on, you should make it a priority to start paying them on time. If you're having trouble paying your existing EMI, you can ask your bank to assist you to restructure the loan so that it's simpler to pay. Repayment history of previous borrowings is one of the dominant factors in determining a credit score, and owning a long history of timely payments can help to achieve excellent credit scores. For doing this, you'll need to make sure you don't miss paying off loan or credit card bills by more than 29 days.
• Know Your Credit Report - Before figuring out how to improve your credit score, you need to know your initial score. As a credit score is the summary of the information in your credit report, the first step of improving your credit score is by building your credit report. A credit report is a date of your repayment history of previous loans, debt, and credit management.
• Avoid applying for a new credit card - As long as you're in credit improvement mode, avoid applying for any new credit card. When you apply for new credit, the lender will usually make a "hard inquiry," which is an evaluation of your credit that reflects on your credit report and impacts your credit score.
• First Pay off 'Maxed Out' Cards - If you use many credit cards and the amount owed on one or more is close to the credit limit, pay off that one first, it will bring down your credit utilization rate.
• Remain Patient and Determined - Being patent isn't a factor in evaluating your credit score. But this is something you would like to possess while you’re in credit improvement mode. Rome was not built in a day, neither will your credit score.

These are some behaviors you may develop over time to help you increase your credit score. Keep in mind that you may not learn all of these skills in a single day. Slowly but steadily, strive toward solid credit habits and a favorable credit profile, and you'll realize how it affects other elements of your life.

The author of this article is Mahesh Shukla, CEO & Founder PayMe India

The views and opinions expressed are not of IIFL Securities, indiainfoline.com