Your CIBIL score or credit rating is a number that is being used by the banks or lending institutions to determine whether to sanction your loan application or not. Various Credit Card companies, auto dealers or banks/private FIs, etc, check your credit score to see your financial standings and capability to pay off your debts. These scores play a vital role to figure out whether you are applicable to get a loan or not. Generally, a good CIBIL score falls in the range between 300-900. But how to increase credit scores or do you need an advanced degree to figure out what is affecting your CIBIL rating?

In this blog, financial advisor, Mr. Ngulminthang Lhanghal is explaining a few factors that affect your score. You must consider them at once to brighten the chances of your loan approval. Here they are as follows:

1. Your Payment History - Your payment history holds a significant weightage on your score and even one missed payment can bring a negative impact on your profile as a borrower. It is a record of whether you’ve paid your bills on time or not including credit card bills, student loans, mortgage loans or car loans, etc. By evaluating your payment history, the lenders want to make sure that you can pay back your debt on time. So, if you have multiple bills & loans to pay, set up reminders or alarms to avoid missing or delayed payments. It can have a poor impact on your score.

2. Outstanding Debt/Amount Owed - The number of debts you owe holds 30% weightage of your CIBIL score and it can even adverse the situation when your reports show any amount owed. Also known as your credit utilization ratio, it is calculated by comparing your credit limit to how much you have used. So, it is recommended to keep your credit utilization ratio at 30% or less by paying down your balances & settling all your outstanding debts.

3. Length of Credit History/Credit Age - Your score also gets affected by how long you have been using credit facilities. For example, the number of years you have hard obligations, your oldest credit account, the age of your new credit account, or the average age of all your accounts, etc. It holds 15% of your overall scores. Generally, the longer your history is, the higher your scores will be. Though a short history will also work as long as you made your payments on time.

4. New Credit - The number of credit accounts you recently opened or the inquiries made by the lenders play a vital role in your score. It accounts for 10% of your CIBIL score. Soft inquiries do not have a serious impact on your score but hard inquiries as they occur to check if you qualify for a loan or not. One or two inquiries are fine but several inquiries within a short period can hurt your score. So try to keep your applications to a minimum.

5. Credit Mix - It holds 10% of your score. To put it simply, it refers to making sure that you have a good mix of both revolving and installment accounts such as a good mix of credit cards and loans. People with good scores tend to have a diverse portfolio of credit accounts consisting of a car loan, credit card, student loan, or other loans. It shows how many total accounts you have to manage well.

Other Factors That Can Affect Your Score

1. Paying Off Minimum Debt Amount - A minimum debt amount refers to a small portion/piece of the principal amount that is owed every month. You may face a bad CIBIL rating if you only pay the minimum debt amount as rolling over the debts by paying only the minimum can lead to compound interest on the outstanding balance.

2. Multiple Card Applications - When you apply for a loan or a credit card, lenders conduct an inquiry to check your creditworthiness by pulling out your credit report. This is known as a hard inquiry and when multiple credit inquiries occur due to multiple applications, hard inquiries are reported that can damage your scores.

3. Errors in CIBIL Report - Your CIBIL report is a detailed record of all your current & past credit accounts. If there are any errors in your report, it can harm your scores. So in case of any discrepancies, get them corrected immediately.

These are some of the major factors that you can consider to avoid a bad rating while applying for a loan. It helps in getting a quicker approval for your loan, cheaper interest rates as well as better deals on credit cards, and many more.

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