Low CIBIL score worrying you? Here is how you can improve it

Of course, a decent CIBIL score ensures that your loan is sanctioned without any hindrance, but beside that, “banks offer lucrative interest rates to people with good CIBIL scores. Higher the score, better the interest rate," said Sujata Ahlawat, VP and Head – Direct to Consumer Interactive, TransUnion CIBIL, pointing out that anything above 700 is a decent score, but people should aim even higher.

What is CIBIL score?

CIBIL score is a three-digit numeric summary of a borrower’s credit history. The score is derived using the credit history found in the CIBIL Report and takes into account borrowers’ credit profile over the last 36 months, i.e. all kinds of loans such as home loans, credit cards, personal loans, automobile loans, overdraft facilities etc that one has availed and the payment history on these.

Here are the factors that determine CIBIL score

• Paying your loan EMIs and credit card bills on time by the due date is most important for maintaining a good credit history and high CIBIL Score. A single missed payment can reduce your credit score and thereby decrease your creditworthiness.
• The second factor for calculation is the utilisation of credit. For example, if you are using a credit card, it is essential to understand how much you are using it. As a rule of thumb, your credit utilisation should be about 30 to 50%, which means you are not over-leveraging yourself.
• The third factor is the number of enquiries that you have made. Like how frequently you are looking for a loan? Are you applying for too many of them etc.
• Having the right mix of secured and unsecured loans is also important. It is better to have a healthy mix of secured (such as home loan, auto loan) and unsecured loans (such as personal loan, credit cards).

However, if due to some reasons your CIBIL score gets impacted then you can always work towards improving it. Ahlawat said, “Though it might take time, scores will get back on track if one maintains a good payment behaviour."

Here is how to improve your CIBIL score:

Pay the dues incurred: The best possible measure to improve one's CIBIL score is to pay the dues, said Deepak Krishnan, financial planner at Mangrove Wealth. “The consumer might have created a backlog, maybe because he is going through a rough patch or some other issue; however, once things start falling into place start paying the dues immediately."

Then whenever there is some extra money coming in, like a bonus, use it to pay the debts.

Target the higher interest rate first: Secondly, if you have multiple loans, then target the loan with the highest interest rate first, said Krishnan.

Adding to his views, Ahlawat said, it is also worthwhile to consolidate loans, in case, there are multiple credit card loans and personal loans. Take a single loan to combine them and then pay it off. A lot of banks and financial institutions offer such services.

Keep EMI amounts at 30% range of the salary: The customers should ensure that the EMIs he/she is paying must not exceed 30% of the salary. “Anything more than reduces your financial capability to pay off the outstanding EMIs in the long run," she added.

Make lesser loan enquiries: Since the score is already low, the consumer should ensure that he makes lesser loan enquiries and additional credit should be applied really cautiously.

Krishnan advocates that any loans - secured or unsecured - should be paid at the soonest. And the best way to do this, he suggests, target to invest 10% of the EMI you are paying. Then every 3 to 4 years, take the money out to repay the loan partly. “This strategy reduces the burden of the loan immensely."