Borrowers applying for a home loan must check their CIBIL score before beginning the loan application process and move ahead with the process only if their CIBIL score is at least 750. TransUnion CIBIL is one of the most well-recognized credit information agencies in the country. The company assigns CIBIL scores to borrowers based on various factors, such as the borrower's repayment history, the age of their credit history, dependency on credit, etc.
The CIBIL score is important as it affects a borrower's home loan eligibility and ability to get approved for a home loan. A high credit score reflects high repayment capacity and therefore, minimum risk for the lender. Thus, borrowers with a high CIBIL score, i.e. anything between 750 and 900, get approved for a loan quickly. Further, they also get offered lucrative terms and conditions, such as low interest rates and high loan sanctions, on their loan deal. A low CIBIL score, on the other hand, reduces one's chances of getting approved for a loan.
Borrowers must move ahead with the home loan application process only if their CIBIL score falls within the excellent category. The question is what should one do if their CIBIL score is low. How to increase CIBIL score? In this article, we get into the details of reasons for low CIBIL score and share with our readers tips to increase CIBIL Score.
How to Increase CIBIL Score? Here Are a Few Tips That Will Help
1. Work on Your Repayment History
Under the FICO scoring model which the TransUnion CIBIL uses, an individual's repayment history makes up 35% of a borrower's credit score. In other words, borrowers who have always paid their EMIs and credit card bills on time and therefore, have a clean repayment history will automatically have a high CIBIL score.
If you want to increase your CIBIL score, the first thing you must do is build a clean repayment history. Never miss loan EMIs and credit card bill due dates. Set up auto payments and pay bills before time. Do this for an extended period of time and your credit history will improve automatically, if it is not already good.
2. Maintain a Low Credit Utilization Ratio
The credit utilization ratio is the percentage of one's total credit limit that is already in circulation. Let us understand this with an example. Let us assume that the limit on Mr.X's credit card is Rs.1 Lakh. If Mr.X has made purchases worth Rs.30,000 and this amount is due to be paid in the next cycle, their credit utilization ratio would be 30%.
A high credit utilization ratio indicates excessive dependency on credit and therefore, a high credit utilization ratio also translates into a low CIBIL score. If you want to improve your CIBIL score, keep your credit utilization ratio under 30%. Use your credit cards judiciously and clear the entire amount due each month. Many people build the habit of paying only the minimum due on their credit while also simultaneously using the card for more purchases. This inevitably causes their credit utilization ratio to go up and CIBIL score to go down.
3. Do Not Have Too Many Hard Enquiries On Your Name
Borrowers are advised to check their CIBIL score before applying for a home loan. When borrowers check their CIBIL score, the enquiry they make gets registered as a soft enquiry. Soft enquiries have no impact on a person's CIBIL score. On the other hand, every time a borrower applies for a home loan, the lender they apply to connects with one of the recognized credit information bureaus to enquire about the borrower's creditworthiness. When lenders check a borrower's credit score, the enquiry gets registered as a hard enquiry. Too many loan and credit card applications portray a borrower to be credit hungry and therefore, causes their CIBIL score to go down.
How to increase CIBIL score? Apply for loans and credit cards only when you need them. If you ever get rejected for a loan, wait a few weeks before applying for another one with another lender.
4. Never Close Old Credit Cards and Loan Accounts and Maintain a Healthy Credit Mix
Under the FICO model, the age of a person's credit history and the variety in their credit mix add up to 25% of a borrower's credit score. Loans are of two types: secured and unsecured. Lenders prefer to lend money to borrowers who have a healthy mix of both secured and unsecured loans. Thus, borrowers who have a healthy credit mix have a high CIBIL score. Similarly, the age of one's credit history also affects their CIBIL score. The longer a person's credit history, the higher will their credit score.
So, here are two more tips to improve your CIBIL score: maintain a healthy mix of both secured and unsecured loans, and never close old loan accounts and credit cards. Keeping older accounts active can positively impact your credit history. By following these strategies on how to improve your CIBIL score, you can enhance your overall credit profile and borrowing potential.
Final Words
Most lenders within the country work with TransUnion CIBIL to understand a person's creditworthiness and repayment capacity. The CIBIL score helps lenders assess a person's repayment capacity and creditworthiness. A high CIBIL score therefore leads to a person getting approved for a loan quickly and also getting a loan on good terms and conditions. If your CIBIL score is not too good, do not worry. It is entirely possible to improve one's CIBIL score. The tips mentioned in this article will certainly prove helpful in this regard.
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