Your credit score is a three-digit number assigned by CIBIL that represents your credit history. And every time you apply for a loan, lenders analyze all your debt and repayment history and require your CIBIL score to check your credibility.
A good CIBIL score indicates that you are financially sound and have a good track record with all your loans to date. Plus, it helps you get loan approvals on the best possible terms. However, a low CIBIL score can be counterproductive and affect reliability.
How is CIBIL Score Calculated?
Multiple factors build up your CIBIL score and based on the same your CIBIL score is calculated:
Your repayment history–
Timely repayment of previous and existing loans has a positive impact on creditworthiness and leads to high credit ratings. On the other hand, late payments can hurt your credit score and make it harder to borrow in the future.
A good repayment history indicates that you are consistently paying your debts on time, and your lender has confidence in you for new borrowings. As a result, loan applications are always approved with a good CIBIL score.
Late payments also incur late fees, but penalties increase the total payment amount. To avoid such consequences, you need to repay the loan on time. This will also help you maintain a good CIBIL score.
Multiple loan applications–
Applying for a loan several times with various lenders might result in hard inquiries on your credit report (CIBIL). This may lower your grade even further. Therefore, it is usually advisable to verify your CIBIL score before to loan application. By doing this, you may also determine your eligibility and limit your application options to lenders who meet your eligibility requirements. This will increase the likelihood of loan approval while decreasing the likelihood of loan rejection.
Type of loan availed in the past–
numerous loans raise your debt to income ratio, which is already seen unfavourably when they are numerous unsecured loans. Therefore, if you have asked for several loans in a short period of time or have several credit cards, this may give the impression that you are credit-hungry, and lenders may be reluctant to lend to you in such a situation.
Write-offs–
Write-offs have a significant negative impact on your credit score. Additionally, current write-offs have a worse impact on your credit score than older ones do.
It’s crucial to verify your CIBIL score before applying for a loan to prevent these effects. Additionally, by doing this, you’ll have a good notion of whether or not your loan application will be granted.
How to Build CIBIL Score?
A person with no borrowing records has zero to negative CIBIL score, this is not considered good as lenders don’t have any record to rely on the applicant. So, if you have to avail of any loan in the near future, to eliminate the hassles you need to build a credit record for yourself. Steps to build a credit record:
Apply for a credit card–
Applying for a credit card and using it can create a credit report on your name. But, before you go for this, you need to remember that credit cards have high-interest rate charges. And to maintain healthy finances you need to be timely with the credit card bill payments.
Take a small amount personal loan–
Taking a small amount of unsecured/personal loan will also help you to create a credit report for yourself. But to move your scores to a positive end you need to be timely with the repayments. Further, you can choose to close your loan account by going for a pre-payment as the interest rate charged for an unsecured loan is high.
Apart from these, it is always important to check your credit score once in six months. Doing this will help you to rectify the errors and wrong reporting (if any) in your credit report. In case you find any you need to report it to the CIBIL or you can also write it to your lender.