Have you ever been turned down for a loan or a credit card and wondered why? Or have you ever compared interest rates with a friend or colleague and found theirs to be lower than yours? It all comes down to your CIBIL Score, a three-digit number ranging from 300 to 900 that reflects your creditworthiness.
Think of your CIBIL Score like a first impression – it's a snapshot of your financial habits and trustworthiness. Just like a good first impression can leave a lasting positive impact on people, a high CIBIL Score can create a positive impact on your financial life. On the other hand, a poor first impression could be hard to shake off, just like a low CIBIL Score could make it hard for you to get credit when you need it the most.
When you apply for a loan, credit card, or any form of credit, lenders use your CIBIL Score to assess how likely you are to repay the debt. A low score can make it harder to get approved or result in higher interest rates, while a good score can give you access to lower interest rates and better loan terms. This is why building a strong credit profile and maintaining a good CIBIL Score of 750 or higher is crucial.
So, how can you build a strong credit profile and improve your CIBIL Score? It's a lot like maintaining a healthy lifestyle. Just as you need proper nutrition and exercise to maintain your physical health, you need to follow good financial habits to maintain your creditworthiness. Here are some tips to get you started:
1) Pay your bills on time: Your payment history accounts for approximately 35% of your CIBIL Score. Paying your bills in full on time can improve your credit score, whereas missed or late payments can damage your score and remain on your credit report for up to seven years, hurting your future eligibility as well. Setting up reminders and automatic payments helps you stay on top of payments.
2) Avoid maxing out your credit cards: Your credit utilisation ratio is another factor that impacts your CIBIL Score. It's a measure of the amount of credit you're using compared to your credit limit. Ideally, you should aim to keep your credit utilisation below 30%. For instance, if your credit limit is Rs. 50,000, try not to use more than Rs. 15,000 at any given time. Going beyond that makes you a risky borrower as it may indicate that you're overextended or struggling to manage your finances. This can lower your CIBIL Score. It can be helpful to distribute your expenses across your credit cards if you have more than one. Or, try to negotiate a higher credit limit with your lender.
3) Diversify your credit mix: Your credit mix also plays a role in determining your CIBIL Score. Having a diverse mix – such as a credit card, a home or car loan, and a collateral-free personal loan – can demonstrate to lenders that you're responsible with credit and can handle multiple types of debt efficiently. However, avoid applying for loans or credit cards unnecessarily as this too may hurt your credit score.
4) Limit your credit applications: Avoid applying for loans and credit cards you don't need, just because you can. Every time you apply for a credit product, it generates a 'hard enquiry', which will stay on your credit report for two years. If you apply for credit too frequently, it can signal to lendsers that you're credit-hungry and unable to manage your finances responsibly. So, only apply for credit when you need it, and try to limit your applications and space them out over time.
5) Don't close old credit accounts: Though it might seem like a good idea, closing old credit accounts can hurt your credit score. Even if you aren't using them regularly, it's wise to maintain old credit accounts by using them occasionally. Closing these accounts will lower your credit limit and increase your credit utilisation ratio, both of which will impact your CIBIL Score negatively. Besides, old credit accounts add length to your credit history and prove that you have an established track record of responsible credit management to prospective lenders.
6) Check your credit report regularly: Your credit report is also prone to human error. Ensure that you review your credit report regularly for inaccuracies, such as accounts that don't belong to you or incorrect payment information, and see that it's always up-to-date. Dispute any errors you identify with the credit bureau and get them corrected.
You can easily check your credit report and implement all these tips with your personalised dashboard on Bajaj Finserv Credit Pass. It equips you with a complete overview of all your credit accounts so you don't lose track of any upcoming payments. You can check your credit health report in real-time and effectively monitor the factors that affect it. With Credit Pass, you can generate unlimited credit score checks. You can also unlock pre-approved offers for a hassle-free borrowing experience.
Remember, building a strong credit profile is a lot like building a house. Just like a house can't be built overnight, a good credit score cannot be established in a day. It takes time, patience, and discipline to build a strong credit profile. Each good financial decision you make is a brick that adds to the foundation of your credit profile, making it stronger.
Disclaimer: This article is published in association with Bajaj Finserv and not created by TNM Editorial.
