Hey Guys! How are you doing?
Welcome to episode 10 of the Little Saves podcast. Every week, we talk about something interesting in the world of personal finance. This week is no different. Today, we look at What is CIBIL score, why is credit score important and look at ways you can improve cibil rating and keep your score high.
Be it you applying for a car loan, home loan or a credit card, the companies giving you the money will as a part of checking loan eligibility consult your CIBIL report.
What is a CIBIL score?
In school how do you know who is a good student and who is a great sportsperson? You know a good student based on the marks they get in exams, you know who is a great sports person based on the number of runs, goals or wickets in the sports you are looking at. In these two scenarios, the marks and runs act as a measure to help you distinguish between good from the poor.
As an adult, banks, companies and other institutions need to distinguish between a good responsible adult and an irresponsible one. This is so that they know who can be trusted with the money given out as loans.
CIBIL score is just that measure. This score gives an indication to banks and lenders of the creditworthiness of an individual. The CIBIL Score looks at past financial performance of an individual in terms of loans taken, paid back, defaults, late payments etc. Aggregating all these, the agency gives each individual a score ranging from 300 to 900. The higher your score the better, with 750 and above being considered as a good score in general.
Why is CIBIL Score Important?
CIBIL score is important when you are in need of any financial support from agencies. Companies use your credit history and past credit information to know if it is safe to give money to you. In India, they check your CIBIL rating to decide whether to lend you money or not. In some countries such as US and Canada, the credit score also decides the rate of interest you get for your loan. In India, thankfully, the CIBIL rating does not affect interest rate that much. But, there are a number of scenarios in a person’s life when their CIBIL score is checked:
– Applying for a credit card
– Home loans
– Personal, Auto, Consumer loans
– Opening current account
– Some key high level jobs look at your score when hiring you
How is CIBIL Score calculated?
CIBIL score is based on 3 major factors:
The rating agency gets a report from all banks and other lenders on every individual. The loans and credits you have taken in the past are tied to your PAN card number. As such the agency is able to look at your past performance on these loans. How much money you borrowed, how much you paid back, did you miss any payments etc are all
Credit Hungriness or Utilization
The rating agency looks at how much you have utilized the total credit available to you. For example, if you have a total credit limit of Rs.5 Lakhs, if you are constantly using up 4.5 lakhs out of it, it will put you at a greater risk. This would mean you have less room to take up more debt and even worse, this high credit utilization indicates that you already have a lot to payback beyond your means. This will inversely impact your credit score and credit report,
Your portfolio of liabilities will include secure and unsecured debts. The secure debts will be home loans, car loans, gold loans etc. Unsecure debts will be Credit card usage, personal loans etc. The ratio of your secure to unsecure debts too play an important role in deciding your credit score.
There are a few other minor factors that are considered such as you utilizing your cards, paying back on time, closing loans promptly etc.
How can I keep my CIBIL Score High?
Payback on time every time
This is the most important factor. Irrespective of the loans you have taken and how large or small they may be, never default on them. Make sure you pay the EMI promptly. Credit information bureau such as CIBIL monitor your payment history and use this as a guide to prepare your credit report and credit score.
Use what is given, close the rest
Utilizing credit cards and loans is actually is a good way to keep your CIBIL score high. This shows the agencies that you are dependable and trustworthy. On the other hand, if you have a lot of cards that you don’t use, close them. There is no point in holding on to them.
Keep watch and be alert
Keep an eye on your credit score and check CIBIL score often. Also once in a while, apply for the complete CIBIL report that gives a detailed information report. There are plenty of ways for you to get a CIBIL check for free. If you notice anything suspicious or a mistake immediately report to the CIBIL agency via their contact channel. The last thing you want is to have someone else’s loan defaulted bringing your score down (and this has known to happen in the past)
Borrow within you means
Don’t show signs of over stretching your finances. If you are earning Rs.50,000 a month, you will need at least half that to take care of household expenses etc. Taking an unsecure personal loan of Rs.25 lakhs is clearly not a good sign. Even for credit cards, try not to utilize your credit limit to the max often.
So to sum it up, as the world moves to a more digital form, the tactics we used to use 10 years back to get your uncle or local MLA to put in a word for your loan may no longer work. Companies are moving fast and Artificail intelligence is evolving even faster. So, it is in your own interest to be financially responsible and pro-actively maintain a good credit score. Improve your credit reports, CIBIL report and other credit scores to enjoy better credit card approval rates, loans credit and maybe even better interest rates in the future.
That’s it for today guys. Ask your questions in the comments below and keep this interactive. Take care and stay safe!