You have often heard that CIBIL score measures your creditworthiness. Banks often check your credit score before giving you a home loan, personal loan or even a credit card. A credit score of at least 750 is essential for getting loan easily. Here we are talking about CIBIL score. Remember that CIBIL is just a credit evaluation agency and there are also other such authorized agencies in India like Experian, Equifax, CRIF etc. Of course, it is TransUnion CIBIL that has the biggest market share and has become synonymous with credit assessment.
What impacts credit score?
What is a good credit score? As per CIBIL classification, CIBIL score can range between 300 and 900. Normally, 750 is a good credit score in India as per CIBIL that lenders insist on for loans. However, people with lower credit scores also get loans, but rates may be higher or tenure would be shorter. Higher the credit score, the better it is. Here are some factors that influence your credit score. Weightages are approximations across agencies.
- Your payment history has around 30% to 35% weightage in credit score. The more cheque bounces, EMI delays and ECS rejections you have, the lower your credit score and greater the chances of loan rejections.
- Your total debt has a weightage of about 30% on your credit score. If you are over leveraged, your chances of getting loan are low. For example, if you home loan EMI is 35-40% of your take home it is ok; but 70% is not OK. Check credit card utilization levels.
- Length of credit history has a weight of around 15%. This is slightly tricky and the longer you have had debt, the better it is. Of course, servicing does matter.
- Your credit mix has about 10% weightage. It is considered better if you have a combination of secured and unsecured debt across different categories
- Strangely, number of credit inquiries will also impact credit score so don’t just keep making online applications for loans. It impacts your credit score.
The basic rule is to pay your instalments on time and keep borrowings under check. If you are looking for what is a good credit score, then that is the key to a good credit score in India.
Why and how to maintain a healthy credit score?
Having understood the concept of credit score, why should you maintain a good credit score? Simply put, it makes getting loans easy, you can bargain for better loan terms and you can even bargain for longer tenures. Banks are willing to lend you an umbrella when it is not raining, since that is when the risk is lowest. Similarly, banks are most willing to lend to you if you have a clear record and yet are not desperate for the loan. Let us now look at how to maintain a healthy credit score in India.
- Debt servicing should always be prompt. Every lender loves to lend to a person who repays promptly and the banks giving you a home loan or personal loan is no different. If you have a track record of prompt payment of EMIs on loans, you automatically have a good credit score. There is not rocket science.
- Cheque bounces and ECS bounces are a strict NO. Remember, the banks don’t just report EMI bounces to CIBIL, but even routine cheque bounces are reported to CIBIL and that impacts your credit score. If there are cheque return charges in your bank statement, that is a negative factor for your credit score.
- What if you get into financial troubles when your loans are ongoing? The RBI offers a one-time rescheduling facility. You can talk to your banker and avail this facility. It is better than defaulting. Using the rescheduling facility once during the tenure of the loan, does not impact your credit score. That is what you can use in extreme conditions.
- Pay credit card bills on time and pay as much as you can afford to pay. There are two reasons. Firstly, credit cards charge you interest at 35% to 40% per annum, so you are paying a fortune. The 5% revolving credit looks good on paper, but comes at a huge cost. Keep your credit card low to boost your credit score automatically.
- Keep your overall debt levels in check. For example, if your monthly take home pay is Rs1 lakh and you are using up Rs80,000 each month as EMIs on loans, you have a problem there.
- Last, but not the least, understand the factors impacting your credit score and keep a tab on your credit score. CIBIL updates your credit score each month and be cautious of any negative changes to your credit score and take immediate action.