In the game of personal finance, your CIBIL score is the
scoreboard - stay updated to ensure you are always winning. By staying informed
about your credit health you can detect errors, spot potential fraud, and
address areas that need improvement before they impact your financial
opportunities.
A poor CIBIL score may lead to the rejection of loans or
higher interest rates, whereas a healthy score opens new doors to better
financial products. CIBIL score is a kind of financial fingerprint that helps
lenders to assess your creditworthiness. Being in control of and keeping track
of your CIBIL score makes it possible to respond in time to improve it, thus
avoiding costly financial pitfalls and getting back on a path to long-term
stability. This blog shares how CIBIL scores work, how they are calculated, and
why they matter, especially for personal loans.
Significance of a High CIBIL Score for Borrowers
Do you know why the CIBIL score is such a widely discussed
topic? It's not just some random number, you know; it carries significant
importance. Your CIBIL score works as an indicator for banks or loan companies
to share how likely you are to repay the money you borrow. Here is why it
matters so much:
1. Quicker Loan Approvals
A good CIBIL score, generally 750 or above, will make it
easy to get approved for loans or credit cards. The banks perceive you as
low-risk and will process your application more easily.
2. Lower Interest Rates
You can get loans at a low interest rate since you have a
good score, saving substantial amounts on big loans, like home or car loans.
3. Higher Credit Limits
Credit card companies may provide better limits to
individuals with high CIBIL scores. This way, you may spend more and have
higher flexibility.
4. Speedy Approvals
With a good score, lenders are likely to process loans and
credit applications faster as you're considered reliable.
5. Negotiation Power
A good score gives you the negotiation power to get better
deals, such as reduced fees, increased limits, or favorable rates.
6. Access to Premium Cards
High CIBIL scores often help you qualify for premium credit
cards that offer exclusive benefits like travel rewards, cashback, and higher
limits.
How Knowing Your CIBIL Score Helps Avoid Costly Financial Errors?
Staying financially secure starts with one simple habit: viewing your CIBIL score
regularly. Regularly viewing your CIBIL score can act as a proactive measure to
avoid financial pitfalls. By monitoring your score, you gain insight into your
credit health, enabling you to identify and address potential issues early,
such as missed payments or high credit utilization.
A periodic review helps you spot inaccuracies or errors in
your credit report that could negatively affect your score. Knowing your CIBIL
score also empowers you to make informed financial decisions, such as applying
for loans only when your score is strong enough to secure favorable terms.
Ultimately, staying updated on your CIBIL score allows you to maintain better
control over your financial journey, reducing risks and ensuring long-term stability.
Calculation of the CIBIL Score
The CIBIL score is derived from an algorithm that evaluates
several key factors. Here's how each aspect contributes:
1. Repayment History
• Reflects your record of timely payments for loans and
credit cards.
• Missed or delayed payments can significantly lower your
score.
• Consistent on-time payments can boost your score by up to
100 points.
2. Credit Utilization Ratio
• Indicates the percentage of credit you have used relative
to your credit limit.
• Keeping utilization below 30 % is ideal; higher usage can
reduce your score by 30 to 50 points.
3. Credit Mix and Length of Credit History
• Considers the types of credit (secured and unsecured) and
how long you have held them.
• A balanced mix and a long credit history can enhance your
score.
4. Number of Credit Inquiries
• Tracks how often you apply for credit.
• Frequent applications within a short period can lower your
score by 20 to 30 points.
5. Credit Age
• Averages the age of all credit accounts.
• Closing older accounts can reduce the average age,
potentially lowering your score.
What Causes Your CIBIL Score to Change?
Numerous factors can positively or negatively affect your
CIBIL score:
• Payment History: All timely payments boost the score while
missing or late payments are a detriment.
• Credit Utilization: High usage of credit limit suggests
overreliance on credit and, thus, lowering the score.
• Length of Credit History: The older your credit history,
the better. New accounts just do not provide enough data for favorable
assessment.
• Credit Mix: A balanced portfolio of secured, such as home
loans, and unsecured loans, such as credit cards, is advantageous.
• Number of Inquiries: Too many "hard inquiries"
in a short time indicate higher credit dependency, which can affect your score
negatively.
• Unpaid Debt: High levels of unpaid debt, especially
unsecured loans, can reduce your score.
Steps to Build and Maintain a Strong CIBIL Score
Some actionable steps to maintain or enhance your CIBIL
score are as follows:
1. Pay on Time: Use reminders to clear EMIs and credit card
dues before the due date.
2. Limit Credit Utilization: Keep usage below 30% of your
total credit limit.
3. Diversify Credit: Maintain some mix of secured and
unsecured credit.
4. Avoid Frequent Applications: Limit credit or loan applications to avoid multiple hard inquiries.
5. Monitor Credit Report: Regularly check your report for
errors and address them promptly.
Conclusion
Understanding the components of CIBIL score - repayment
history, credit utilization, credit mix, and inquiries - can help you manage
your finances better. A good score opens doors to easier approvals, lower
interest rates, and better credit opportunities. By adopting sound financial
habits, you can not only improve your score but also secure a solid financial
future.
Stashfin offers an easy way to check and monitor your credit
health by allowing you to view your CIBIL score directly through their
platform. With this feature, you can stay updated on your creditworthiness,
track improvements, and take informed steps to manage your finances
effectively.
