How to improve your CIBIL Score?
How CIBIL score is affected?
Many financial institutions such as banks have clear mandate from the RBI to check Credit Information Bureau (India) Limited (CIBIL) for evaluating all loan applications. Therefore, many times first time loan applicants (no CIBIL record!) or people with low scores are unable to avail of loans from banks / NBFCs.
So, how does CIBIL play a role in loan evaluation? Usually, lending is function of primarily two parameters –
- Ability to pay
- Intent to pay
CIBIL report / score is used to understand ‘intent to pay’ based on analysis of historical financial data.
CIBIL keeps track of your loans and credit cards data as such information is submitted to CIBIL by member banks and credit institutions on a monthly basis.
This information is then used to create Credit Information Reports (CIR) and credit scores which are provided to financial institutions to help them evaluate loan applications.
In case, you have missed or delayed few payments, you need to work on your CIBIL and build financial discipline to improve your credit worthiness.
How CIBIL Score can be improved?
For improving credit score rating in CIBIL one must avoid late payment or defaults in loans and credit card payments. If one missed payments on any of his existing loans over the last two years, credit score is likely to be negative as it indicates inability to serve existing obligations better.
There are few tips which can help you improve your CIBIL score.
Avoid high utilization of credit limits
Are you an avid user of credit card? Increased utilization of credit limits of your credit card may not affect credit score directly, however if your outstanding amount is continuously on higher side, then it can impact negatively on your credit score. It is always advised to use your credit card smartly and pay your all dues continuously and on time. As your loan burden reduces, your CIBIL score improves.
Avoid high current balances
- The top and foremost thing is to minimize the usage of credit card i.e. keeping the credit utilization ratio to minimum.
- Spend only what you can repay within the billing date.
- High current balances pull down your score.
- Also, it is advisable to keep one or two credit cards only.
- Close all undesired credit cards by clearing the due.
- Keep only those or that card where the repayment track record is good and is the oldest. This helps in building good credit history over a time period.
Pay not just the ‘Minimum Amount Due’
- Many people feel to avoid any late fee charges or negative CIBIL reporting, paying minimum amount due is enough but in reality this attracts finance charges in every cycle.
- You are only paying the interest on your amount due and rest of the bill remains as it is. It is better to always report inaccuracies if any or to pay off little debt in each cycle.
Pay EMIs on time
- No excuse on delaying or defaulting on EMIs.
- This is the foremost discipline which one could inculcate.
- Always pay your EMIs on time.
Reduce number of unsecured loans:
like personal loans, clean bank overdrafts affect credit score negatively in CIBIL. It is better to avail home loan, auto loan and consumer loan which are secured by assets to improve credit score.
If there are many applications for loans from a borrower, it indicates his credit hungry behavior. Credit institutions discourage such borrowers.
To improve credit score rating in CIBIL one must avail minimum credit and secured loans instead of personal or unsecured loans.
Always remember a good CIBIL is a reflection of how disciplined you are with your spending and repayment habits. However, low CIBIL does not mean that all the avenues to borrow are closed. One can switch to modern medium of alternate financing called Peer to Peer Lending.
P2P Lending provides an alternate medium to borrow
There are several platforms such as i2ifunding, Milaap etc. which help the borrowers with weak credit profile to get loans at very competitive rates.
In India, online P2P lending is in its nascent stage, however has been growing very rapidly in past few months. Apart from CIBIL score, P2P lenders evaluate loan applications on multiple parameters such as past financial behavior, future financial prospects, demography, socio-economic factors and education etc.
Therefore, even if your CIBIL is weak or it is taking time to rebuild it, you can borrow at P2P platform.
It can help you get attractive interest rates with no prepayment penalties. You may use the loan amount for paying your credit card bills, consolidating debt, marriage, medical requirements or for any other contingencies.