in the course of everyday life, we need to spend money to buy goods and services to survive and even improve our quality of life. but we don't always have access to enough cash immediately.
still, it is possible to borrow money for a fixed duration.
the money that you borrow is known as "credit." how you manage your borrowings and repayments is called your credit behavior.
the three consumer credit reporting agencies that monitor credit behavior are Transunion CIBIL and Equifax, based in the US, and Experian, based in Europe. these agencies' data collected on your credit behavior appears as a three-digit number called your credit score.
while we consider a credit score of 750 and above as good, any lesser number falls into a low credit rating category.
if you put in an application for a loan or credit card or even want to open a bank account, you require an excellent credit score. your credit score depends on several factors.
in this article, we will explain some of the factors affecting your CIBIL rating and how you can secure a healthy CIBIL score.
there are more considerations than merely returning the money you borrowed on time to be a responsible borrower. by following these tips, you can command a good CIBIL score:
1. be up-to-date with your payments
35% of your credit score comes from your payment history. hence, you need to be up-to-date with payments. if you have difficulty remembering when particular payments fall due, you can download an app that generates payment alerts.
another best practice is to set up automatic payments to debit directly from your bank account within the due date every month. you need to maintain sufficient balance for making the required payments.
2. monitor your CIBIL score regularly
you're allowed an annual free credit report from all credit rating agencies, including Transunion. avail of this option and familiarize yourself with the report. you will not only come to know your CIBIL score, but you can check for errors.
for example, if a lender has forgotten to inform CIBIL about a loan that you closed, it could feature in the report as pending dues, which can lower your CIBIL score.
you are entitled to get any errors in your credit rating corrected. however, identifying an error and flagging it up with CIBIL is solely your responsibility. it is best to ensure that your credit history reflects your financial activities accurately.
3. avoid canceling old credit cards
keeping an old credit card, even one that you don't use anymore, can be advantageous. a credit card with a payment history spanning several years can contribute to up to 15% of your credit score.
credit reporting agencies respond favorably to a credit card account that has been kept up-to-date for several years.
the primary condition that you need to fulfill, of course, is to ensure that you are clearing the monthly bills of each card. you can get a standing order set up to automatically pay a small, monthly recurring bill like a utility bill.
the exception to this rule is a card that has a high annual fee - go ahead and cancel such a card by all means.
4. give all your debts equal consideration
your credit score will not discriminate between a revolving debt (credit card) or an installment debt (mortgage). your debts are likely to have different interest rates, and you may be tempted to prioritize payments that have more interest rates.
don't make that mistake and treat all your debts equally. even the smallest outstanding amount will create an impact on your CIBIL score. it can result in jeopardizing your prospects of getting loan and credit card applications approved, based on your credit score.
5. familiarize yourself on your eligibility for new loans
today loans are being offered literally at your doorstep. you get phone calls and emails offering you loans at unbelievable interest rates daily. but don't be carried away with these offers.
you should check your eligibility for any loan before applying. if you apply for a loan and get rejected, it affects your credit rating. hence, only apply for a loan once you are sure of meeting all the eligibility criteria.
6. do not enter into debt settlement agreements
sometimes a lender will offer the facility of reducing the extent of the debt. you can approach your lender, and they will agree to reduce, say, your credit card outstanding by a particular amount subject to specific terms and conditions.
it's a very tempting deal if you are deep into debt and looking for a way out. you may get some relief from your outstanding debt, but it can be extremely damaging to your credit score.
by availing of the provisions of a debt settlement agreement, it reflects that you cannot manage your finances responsibly, and your CIBIL score will get affected. steer clear from such arrangements with a lender.
7. never withdraw cash with your credit card
you may feel that getting cash through a credit card is similar to withdrawing cash using a debit card.
the difference is that a debit card gives you access to money that is already held in your bank account. a credit card gives you a provision for money that you do not have.
it seems like a reasonable arrangement, especially when you are hard-strapped for cash, right? not exactly.
you will end up paying a high-interest rate for the money that you get through a credit card. moreover, it indicates that you are in desperate need of money, and you are not financially responsible.
8. ensure that each credit card gets minimum usage
make sure to use each of your credit cards from time to time. if you have a card that you do not use at least once in a while, your credit card company may close down your account, declaring your credit card inactive.
furthermore, many companies give rewards against credit card usage, so you can enjoy discounts and money-back offers by using your credit card. it is imperative not to forget to make your credit card payment every month within the due date. to this end, you can look into an automatic monthly payment into your credit card account.
9. maintain a low credit balance
here is a slightly technical aspect of credit ratings, which you might not be aware of. the two components on your credit card account are your credit balance and your credit limit. the relation of these two elements is reflected in what is called your credit utilization rate (CUR).
it is desirable to maintain a low credit balance as compared to the credit limit on your account. the lower the percentage of CUR on your account, the better will be your "debt-to-credit ratio." the CUR is not money, but a ratio that relates credit balance to a credit limit.
it is preferable to maintain a low credit balance compared to the credit limit on your credit card account. consumer credit reporting agencies will look favorably at an account with a low CUR.
if you feel that your spending is increasing more towards your account's credit limits, it is a good idea to get an additional credit card if you can manage the repayments. that way, you can split your spending across the two cards and reduce your CUR.
10. aspire for a balanced credit mix
the two types of loans in the world of finance are secured loans and unsecured loans. a secured loan is taken out to pay for a fixed asset like a house or car. a surety is offered as collateral, such as other property to "secure" the loan.
an unsecured loan can be either a credit card or a personal loan. no surety is offered for this type of credit. that's why it is preferable to take out both types of loans.
having both types of loans makes you appear to the credit reporting agencies in a favorable light. it gives the impression that you can handle all kinds of credit and repay loans promptly. if you maintain a healthy mix of secured and unsecured loans, you will have better chances of getting an excellent CIBIL score.
improving your credit score isn't something that you can achieve in a day. you need to be patient and spend time reviewing your credit behavior to identify areas of development.
as you may now realize, your CIBIL score doesn't base itself on a single factor. there are many contributors to that final figure.
if you reduce your outstanding dues and take measures to create a healthy credit history by following the tips provided here, your CIBIL score will improve slowly but surely.
you will become eligible to avail of loans whenever you need them, and most important of all, you will get the peace of mind that money cannot buy.