Demystifying your CIBIL score?

As India matures into a developed economy and Indians requirement for credit is bound to go up. In such a situation it is important understand what factors go into making a credit score.

December 04, 2013 10:32 IST | India Infoline News Service

A credit score shows the credit worthiness of a borrower. “So lenders are increasingly relying on credit scores which are given by credit bureaus, to decide if the loan should be approved or rejected. Usually, the higher your score the better your creditworthiness and more are the chances of your loan application getting approved,” said a senior official with one of the bureaus in the country.

According to Credit Information Bureau of India Limited (Cibil), there are four major factors that affect the credit score of a person. They are:

  1. Defaults or late payments: Make sure you keep note of the dates when your equitable monthly installments (EMI) cheques pass. Do not default on your payments or delay them. “Missed payments negatively impact credit history which most lenders look into to determine the risk on a prospective borrower, though the recency of this occurrence is also considered,” said the senior official.
  2. High Utilization of credit limits: “While the balances on your loans will only reduce over time as payments are made, you must be diligent about making timely payments on your credit cards. While increased spending on your credit cards may not necessarily negatively affect your Score, an increase in the current balance on the card over time is an indication of an increased repayment burden and may negatively impact your Score. It’s always prudent to not use too much credit,” said the Cibil website.
  3. Get home loan and not credit cards: Lenders love to see a person have a home loan or a car loan over unsecured loans (credit card and personal loans). Home loans and car loans give longevity to a credit history unlike personal and credit card accounts. The unsecured loans show that a person it too dependent on credit which is something that lenders frown upon. Also, unsecured loans are expensive. So keep away from them.
  4. Credit hungry: You have just been granted a loan. Wait for a while before you apply for another one. A couple of loan officers that Creditvidya.com spoke to indicate that ideally a borrower should wait for a minimum of one year before he applies for another loan. “If you have made many applications for loans, or have recently been sanctioned new credit facilities, a credit institution is likely to view your application with caution. This ‘Credit Hungry’ behaviour indicates your debt burden is likely to, or has increased and you are less capable of honouring any additional debt and is likely to negatively impact your Score,” said the Cibil website.

So tread with caution. Use your debit card over a credit card. Choose a secured loan over an unsecured loan. Learn to prioritise things in life. Buying a home is any day cheaper and better than taking a personal of lakhs of rupees for a holiday abroad.

The author is Co-Founder & Director, CreditVidya 

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