In India, multiple credit rating agencies calculate your credit score. Each has its metrics and methods and assigns a credit score under a different term. Since TransUnion CIBIL is one of the oldest agencies, the CIBIL score is often synonymously used with a credit score.
Almost all lenders rely on this score, and it is essential to check your CIBIL score regularly. But before diving into the importance of why you need to check the CIBIL score regularly, understanding how it is calculated is essential.
This information can help you better understand your score and how to increase your CIBIL score, which can help you avail credit facilities easily.
To know more about your credit score, how it is calculated, its importance, and more, read on.
What is a Credit Score?
Your credit score is a numerical representation of your creditworthiness. It gives the lender an overview of your credit profile and helps determine whether you are a high-risk or low-risk borrower.
Credit score often ranges from 300 to 900, and a score closer to 900 indicates that you are a low-risk borrower. As a result, you get quicker access and more affordable credit options due to low default risk if you have a good credit score. This reduces the lender’s risk as you are considered a responsible borrower.
Why is it Important to Check Credit Scores?
Whenever you apply for new credit, the lender will check your creditworthiness by assessing your credit score. A high credit score implies that you are a creditworthy borrower, so it is crucial to understand and monitor your credit score.
When you regularly check CIBIL score and other credit scores, you are more aware of your creditworthiness and can take the necessary steps to fix issues. Moreover, credit rating agencies and most lenders offer a free credit score check that you can use before applying for credit. This way, you increase the chances of availing the credit you need at affordable terms.
What is the Ideal Credit Score?
Scores closer to 900 are ideal, but knowing how close you are to this value can help you easily avail credit. Most lenders have a clear credit score eligibility criterion, which is generally a credit score above 700 or 750 in some cases.
Some lenders even require you to have a particular credit score from a specific credit rating agency. In that case, ensure you check your credit score from that agency before applying. This enables you to enjoy a seamless application process and even increases the chances of hassle-free and quick loan approval.
How is your Credit Score Calculated?
Credit rating agencies have various methods of calculating your credit score. However, there are some common factors credit rating agencies consider when calculating your credit score. These factors include:
Repayment History
Your repayment history refers to how and when you paid your previous debts. This is one of the most crucial factors agencies consider as it is recorded on your credit history. As such, ensure that you repay all your credit dues on time.
Credit Utilisation Ratio
This ratio refers to how much credit you have used against the limit you have. A high ratio implies a high dependence on credit, resulting in a lower credit score. The rule of thumb is to maintain a low credit utilisation ratio under 30%.
Credit Mix
The credit mix refers to different types of credit you have availed, including secured and unsecured. While a secured type requires you to pledge collateral, you can avail an unsecured credit without pledging your assets.
Always ensure that you do not rely too much on unsecured credit. Too many unsecured credit accounts indicate heavy reliability on credit, making you a risky borrower.
Credit rating agencies acquire this information from financial institutions with whom you maintain an existing relationship. Hence, they regularly update and provide your financial information to the agency.
Remember this gap when you check CIBIL score and other credit scores, as the information may take a while to update.
What to Check in a Credit Report?
Knowing what to check in your report is equally important as knowing why you should regularly check your CIBIL score. This information lets you know whether the credit score and report indicate your credit standing accurately.
Look at these sections when you check the CIBIL score and report:
Credit Score
Generally mentioned at the top of the report, this 3-digit number is something you must not miss. If your credit score is below the ideal limit, assess the underlying factors and learn how to increase your CIBIL score.
Personal Information
This section contains your name, contact details, and employment information. Ensure it is up-to-date and accurate. If you notice any discrepancies, raise a dispute with the credit rating agency to rectify them.
Credit Account Information
This section has information on all credit options you have. However, the information only dates back to a certain period, three months in some cases. Make sure your outstanding amount is accurate and closed accounts appear as closed. In case of inconsistencies or inaccuracies, raise a dispute immediately.
How to Improve Credit Score?
If you have been wondering how to increase your CIBIL score or other credit scores, the thumb rule is to improve your credit behaviour and become financially responsible. Here are some tips you can try:
Pay Your Monthly Credit Dues on Time
Set monthly reminders to ensure you do not miss any payments. If you cannot pay the entire amount, try to pay the minimum before the due date. However, ensure not to pay the minimum due every time, as this can have a negative impact on your credit score.
Maintain a Healthy Credit Utilisation Ratio
Aim to keep your credit utilisation ratio under 30%. This means that if your total credit limit is ₹90,000, you should try to use no more than ₹27,000. If you notice you are using more credit regularly, increase your credit limit to decrease the ratio.
Avail Credit Responsibly to Maintain a Healthy Mix
Relying too much on unsecured credit can hurt your credit score. So, when you check your CIBIL score or other credit scores and notice too many unsecured credit accounts, try to close the ones you can.
Avoid Applying for Credit Frequently in Short Span
When you check CIBIL score or other scores regularly, it does not impact the score. But when a lender checks the same, it affects your credit score and gets recorded in your report.
Too many enquiries indicate that you are credit hungry, making you a high-risk borrower. So, if your application was rejected, do not reapply immediately. Instead, wait a while, improve your score, and reapply.
Having a good credit score is beneficial for several reasons, the main one being easy and quick access to affordable credit. So, check your CIBIL score and other credit scores regularly and take prompt action to ensure it does not take a hit.
