In this article we are going to discuss about the following contents;
- What is credit score?
- How your CIBIL score is calculated?
- What is the minimum credit score required to get a loan?
- How to improve your credit score?
- How to build up your credit score if you haven't credit cards or loans?
1. What is credit score?
Credit score is a parameter which is used by finance companies to find out whether you are likely to pay your debt or not.
See the finance companies to which you are going to ask for a loan doesn't know you personally so they don't know that whether you will give back their funds or not. So they use your credit score to decide whether you are are eligible to get loan or not. Now, maybe the question is occuring in your mind is... how my credit score is calculated? See, there are many companies like CIBIL in the market collect your previous transaction data from the finance companies and generate a credit report and this credit report is used by every finance companies.
2. How your CIBIL score is calculated?
CIBIL score calculation is based upon many factors. The image is showing all the factors and their contribution in calculation.
- 30 % Past performance
Past performance shows your payment history that had you make your payment at time or not or if you had make any payment default ever.
- 25 % Credit mix and duration
This shows that how many secured loan and unsecured loan you have get in your history. It is a very important factor in credit score calculation. More loans in a shorter period directly impact your credit score.
- 25 % Leverage
Leverage contributes 25% in calculation. It shows that how much amount of your limit you have used in past transactions.
- 20 % other factors
20% other factors like how many time you check your CIBIL score and many other factors which is not disclosed by CIBIL.
3. What is the minimum CIBIL score required to get a loan?
CIBIL score varies from 300 to 900. This 3 digits number is used by the finance companies to decide whether you are elegible for loan or not. The closer you are to 900 the default probability is considered low from you. If your score varies from 300 to 650 it is cosidered bad by finance companies and they will not approve your loan. If your score varies from 650-750 then maybe you will get loan but at higher interest and it will be considered fair score. Most of the companies approve loan at above the score from 750 as they considered the score good and low default probability.
4. How to improve your credit score?
1. Make payment within the time
Make your all payments within the time. There can be two losses of payment delay one is you have to pay penalty on the delay and second one is your credit score will affect immediately. If you are using credit cards and don't have enough funds to pay whole the bill amount then atleast try to pay the minimum bill this will not affect your credit score that much.
Sometimes we forget the date of payment if you are one of them you also get forget the dates then you can use the ECS (Electronic clearance services) debit method so that the loan installments autamatically be debited from your account at the date you set.
2. Don't let payment default
If you want to improve your credit score please don't make defaults. If you have previous defaults and debt then clear that first and make sure that you will not make any defaults in future too.
Sometimes we don't know when the credit card companies apply some charges on credit cards and while we go to ask that what are the charges they have applied and try to clear that disputes by company, the bill payment due date has been crossed. Maybe later you will cleared your disputes but your credit score is already been affected.
So please don't make defaults or miss your payments, a single default can affect your credit score a lot.
3. Go for long term loan installments
When you are getting a loan make sure that your EMI should be enough less that you can pay easily or you can go for longer tenure installments so that you can pay your installments easily and your credit score won't get affected.
4. Make a good mixer of loans if needed
Make a good mixer of loan means don't take unsecured loan like credit card, personel loan, too much. Because in secured loans first you have to pledge something then the company approve you for a loan but in unsecured loans nothing is pledged and getting too much unsecured loans does negative impact on CIBIL so please try to maintain your loan portfolio. Don't use more credit cards as it will directly increase your unsecured loans which will affect your credit score.
5. Don't get too much loans in a shorter period
If you are getting too much loans in shorter period it will directly affect your credit score and when you will go to ask a loan from companies they will consider high default probability from you as you takes too much loans in shorter period.
6. Don't go too close to your credit limit
As more as you use your credit it does negative impact on your credit score and finance companies. Let say your credit limit is 25 lakhs and you take a loan of 20 lakhs it will directly affect your credit score.
Don't use more than 30% of your credit limit. If you use 30% or less than 30% your credit score will start to improve. If you think the 30% of your credit card limit is too less then you can ask to the company to increase your limit. If you're past payments is clear then may be they will increase your limit.
7. Review your credit report and find the reasons
Check your credit score and get a copy of credit report and then find out the factors which are affecting your credit score. Start working on that immediately. This is a very impactful method to improve your credit score.
8. Don't do too much enquiry
Enquiry of your credit score again and again in a shorter time period will affect your credit score or applying for too much loans in a shorter period can also affect your credit score.
9. Inaccurate informations
Some times inaccurate information has gone to the CIBIL which results lower your credit score. Inaccurate informations like you have cleared the installment but it is not updated still reflecting partial or pending, you have closed your account but it is still reflecting active so go to the CIBIL and ask them to update.
10. Manage your credit cards well
Many people use 4-5 or more than this credit cards thinking that they will pay the bill of 1st from 2nd, 2nd from 3rd, 3rd from 4th, but you know one day you have to pay that bill from your account afterall its a loan. And using that much credit cards increase the no. of personel loans which results lower our credit score. See 2 credit cards are enough and if you have 2 credit cards use the old one the most because the old one which has a long clear transaction history will help in improving your credit score and make sure don't default from that credit card.
Read this article to get some tips on money saving.
5. How to build my credit score (for young ones)
You are young and you don't have loan and credit card too but you want to build your credit score then you can start from these simple ways.
1. Buy household needs on EMI
You can buy your household needs like phone, laptop, refrigerator, Television, washing machine etc. on EMI. These small personel loan can help you in building your credit score.
2. Ask your bank for low limit credit card
If you have just started your career and your salary is to enough to getting a credit card. Then you can go to your bank show them the transaction that you are getting your salary at this date yeah its quite less but it is fixed that i get my salary on this date. Atleast issue me a lowest limit credit card. You can use that credit limit to build your score.
3. Make FD
Put a little amount as a fixed deposit in your bank account and you can ask a low limit credit card on the behalf of fixed deposit. And you can use that cardit to build your credit score.
Conclusion
The credit score plays very important role to getting a loan approval. If you have low credit score due to some past mistakes you can use the above tips to improve your credit score. Remember it is a long process impoving your credit score is not an easy task that you have started applying this tommorow and your credit score will be increased in one month. But you can see the results in 4-5 months if you apply these tips properly.
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