It is very important to have a good Credit (CIBIL) score as it plays a very vital role in one’s financial life. The biggest impact is you may not be able to take loan from most know financial institutions or banks in India with poor CIBIL Score. And in today’s scenario its very difficult to survive without credit card or loans for buying your house, car, going for higher education or even small business loans. Now that you know the importance of CIBIL Score – here are some Tips on How to Improve your CIBIL Score.
For all who are not aware of credit score concept – this is a score provided by credit bureaus based on the financial track record of an individual. By financial track record we mean tracking if you are paying all your EMIs on time, how are you using your credit card, how may loans you have, have you been exploring loans from multiple lenders recently. All these factors and more goes into calculating your credit score.
Difference between credit score and CIBIL score
People often get confused between Credit score and CIBIL score. Just to clarify CIBIL Score is one of the credit score you get in India. Credit Score is the right term to use as it means a score given to predict your creditworthiness – how likely you are pay your future loans or EMIs. CIBIL Score is one of the 4 credit scores that you have in India. As CIBIL is the oldest and largest in terms of coverage, people ofter refer credit score as CIBIL score.
India has 4 credit bureaus: TransUnion CIBIL, Equifax, Experian and CRIF Highmark.
What does CIBIL Score Mean?
The full form of CIBIL is Credit Information Bureau Limited. As stated earlier, it is the oldest credit bureau in India with highest coverage and hence CIBIL score is most talked about. CIBIL score varies from 300 to 900 – the higher the score the better it is. This score indicates your creditworthiness for a future loan that you borrow. CIBIL Score is one of the major factors which decide if you can get loan and if yes how much.
If you see at the chart below, the percentages indicate % of loans that has been sanctioned in the relevant CIBIL score band. For e.g. 57.6% of all loans sanctioned have been for people with CIBIL Score of 800 or higher.
If you look at the numbers more carefully, 80% of loans have been issued to people with score of more than 750 and 90% of loans to people with CIBIL score of 700 or more. The thing to note is there has been loans sanctioned (less than 10%) for poor scores too but it would be very difficult and you may have to do a lot of extra formalities like finding a guarantor, etc.
CIBIL score of 750 or more would make you eligible for most loans across financial institutions. However a lower score might make your loan more expensive or reduce your loan eligibility or in extreme case may also make you ineligible for any loan. The good thing is you can improve on this score. But before that lets understand why some people have poor credit score.
Why do you have Poor Credit Score?
As stated earlier credit score is an indication of your repayment behavior on future loans. Credit bureaus use your historical repayment and other financial information to arrive at this score. A poor score generally means, you have not been prudent in repaying existing loans or credit card bills. Here are some more reasons for poor credit score:
1. Missing repayments/EMIs or Credit card payment – This is probably the major reason why people have a poor credit score. If you have missed your EMI payments or Credit card dues in the past, it would have a negative impact. If you miss some consecutive EMIs or do so frequently, it will have more adverse impact on your score. This indicates two things either you face cash crunch often or are habitual defaulter – which means a risky borrower!
2. High Utilisation ratio on credit cards – Utilisation ratio is ratio of your credit card balance to your credit limit on credit card. For e.g If you have credit card line of Rs 1 Lakh and you spent Rs 10,000 in the billing cycle then your credit utilisation ratio is 10% (10,000/1,00,00). A higher utilisation ratio is taken as negative by creditors. In case you go overboard and spend more than your available credit limit, this would make even more negative impact on your credit score.
3. Higher proportion of Unsecured Loans – Secured loans is one which is backed by assets like Home Loan, Car Loan etc. Loans like personal loans, credit cards are unsecured loans as you do not mortgage anything against these loans. A higher proportion of unsecured loan can hurt your score.
4. Looking for too many Loans too soon – Every time you apply for loan, the bank or financial institution makes an inquiry about your credit score from credit bureau. In case you have applied for multiple loans in very short time, it leads to the creditors thinking you as “Credit Hungary” i.e. person who is looking for a lot of loans in short time.
5. Errors – You may have a poor credit score due to errors. You can imagine that its a large database with 100’s of companies and banks reporting data about their customers everyday. There can be errors due to system issues or manual data entry. It may happen you are regularly paying your EMIs but bank has not updated it. The other case may be bank has linked a wrong credit card or loan to your profile. These can pull down your credit core down without any fault of yours.
How to Improve your CIBIL Score?
Now that we know the major reasons leading to poor credit score, let’s look at ways to improve the same. Please understand that since credit score takes in account a long period of repayment and other financial information, the scores can be improved slowly. Below are some things you should do:
Check credit report for any errors
Errors are not unheard of in credit report. The first step should be to order your credit report, scan for any loans that you might not have taken or scan for errors where your lenders have wrongly reported about your loan status. You might have paid regularly but you might find some lender showing skipped payment and so on. Get it corrected and for that you’ll need to approach your lending institution and CIBIL.
Be regular with your EMIs and Credit card payments
As stated earlier regular payment history on loans is most important contributor to your credit score, so a regular payment helps improve your score. So from now on make sure you do not miss a single payment. You might want to use auto-debit facilities provided by banks to pay bills and EMIs.
Keep your credit card utilisation low
It helps to spend much lower than your available credit limit on credit cards. Keep your utilisation low and do not ever cross your credit limit on your credit card. In case you are high spender, you can also apply to increase the credit limit of your card. Another work around is pay as you spend – as this would keep the utilisation lower.
For e.g. You have credit limit of Rs 1 Lakh and you spent Rs 80,000 this month leading to utilisation of 80%. To lower this number you can pay Rs 50,000 before the bill is generated, this will reduce your balance to Rs 30,000. This means the credit bureau will only see utilisation ratio of 30%. Remember, the reporting happens on the bill and not what you do in between.
Do not cancel your Credit Cards
Many advice to cancel your credit cards to improve the score. But this is not true – its good idea to keep the credit card as it adds up to the total credit limit and your spending on credit card has low utilisation ratio overall – showing you are financially secure. This advice is not applicable if you have more than 3 cards. You must cancel the extras.
Prepay Your Unsecured Loans
Unsecured loans means loans where you have not mortgaged anything for borrowing. Personal Loans, Credit card spending are some form of unsecured loans. So, in case you have personal loans or outstanding credit card balance, closing them might help your CIBIL score to improve. It also makes sense to prepay them as they have higher interest rate and are expensive form of credit.
Do Not Shop too much for Loans/Credit Cards
You might be tempted to apply for every new credit card launched. But it can have negative impact on your score. Only apply for loans/credit card when you require and in that too limit your applications to few reputed lenders.
Monitor your joint and/or guaranteed loans
Have you taken joint loans? A default in EMI would have negative impact on all the borrowers. The case is same for loans where you are guarantor. As a guarantor you have legally agreed to pay in case the original borrower defaults. So always keep checking on loans which you have jointly or where you stand guarantor. And be very cautious of being a guarantor – just assume that you are taking the loan and make the decision.
Get Fixed Deposit Credit Card
If you have poor CIBIL score, chances are low that you would get a credit card or any other loan. But you can apply for credit cards backed by fixed deposits. This can help you show your regular repayments and hence improve credit history.
Stay Away from Credit Repair Company
If someone claims that they can instantly improve your credit score – its not possible until its related to rectification of error! So in most cases it does not help to engage a credit repair company. However, you can contact debt counselling centers in case you are in over-debt scenario.
Also as your duration of credit history increases it impacts the credit score positively. So it makes sense to get a credit card early and use it carefully to build a good credit score. It will help when you actually want to borrow for big purchases like home or car.
How Long Does It Take to Improve your CIBIL Score?
Actually you do not improve your credit score but rebuild your credit history, which is reflected as score. So the time taken depends on the reason for low score. A missed payment would have little impact but continuous missed payments would have severe negative impact and so the time taken to improve the score would also be also more. In most cases the delinquencies remain on your credit report for seven years. In case the poor CIBIL score was due to error, that would improve within 30 days of the error being corrected by the bank.
Ultimately, there is no quick fix and it takes Time to Improve Credit Scores – so have patience, improve your financial habit and the score improves automatically.
Does Poor CIBIL Score means NO Loan at all?
It’s important to know that credit score is just one criteria among many used by lending intuitions to evaluate borrowers. So in case your loan is rejected by one banks does not mean no one else would give you loan. Popular banks are generally more risk averse while smaller NBFCs take more risk. So you can try smaller NBFCs if you do not find success at banks. You might also face loan rejection as you might be too new to credit. This means you applied for loan for the first time and so bureau have no credit history for you. So it’s helpful to get a credit card and use it judiciously early in working life.
Can you get Personal Loan with Low CIBIL Score?
As we mentioned, poor CIBIL score makes things difficult for you but getting any type of loan is not impossible. There are some ways out. Some banks or NBFCs would give personal loans to earlier defaulters or people with poor CIBIL score, if they have very high income and they are looking for lower amount of loan. They can also get a loan if they borrow jointly with a person with high credit score or if a person with Higher CIBIL score gives a guarantee. The other way would be if the person can explain the bank the reason for default earlier and bank may consider the case. So its not the end of road with poor CIBIL score but you will get loans at higher interest rate and your option is very limited mainly with smaller banks and NBFCs.
How can I get loan without CIBIL?
In todays time getting loan without CIBIL score is difficult but not impossible. You can do the following:
1. Borrow jointly with someone who has high credit score.
2. Get a guarantor for your loan
3. Borrow against mortgaging your asset like house, car, shares, mutual funds or gold
4. Try alternate sources – borrow from Peer to Peer platforms or new age Apps who do not refer to CIBIL score
Can you get Credit card without CIBIL check?
All banks would check your credit score before issuing credit card. However if you have poor CIBIL score you can opt for credit cards backed by fixed deposits. Here the bank will offer credit card with up to 90% of your fixed deposit.
What is a bad CIBIL Score?
The CIBIL Score ranges from 300 to 900. The higher the score the better is your creditworthiness. The score of
300 to 549 is considered BAD CIBIL score
550 to 750 is considered as Fair Score
750 to 800 is good CIBIL Score
Anything above 800 is considered excellent CIBIL score
We hope you would have understood the difference between credit score and CIBIL score and our tips on How to Improve your CIBIL Score would help you have a more fulfilling financial life.