How to Improve Your Credit Score or CIBIL Score?
Your Credit Score is the first thing that a bank or money lender looks for to lend you the money. The Credit Score gives an accurate measurement of your financial health. If you have a good Credit Score then it becomes easy for you to be approved for new loans.
A Credit Score also shows the way you manage your Credit. Sometimes you might get a loan at the lowest interest rate if you have a Great Credit Score. In this article, we will go through some general steps through which you can improve your Credit Score, these steps might differ based on your credit situation.
Before getting into how to improve your Credit Score let’s try to gather some important knowledge about Credit Score.
What is Credit Score and Who issues a Credit Score?
A Credit Score shows the Creditworthiness of an individual. A Credit Score Lies in the range of 300-900. The Credit Score is issued by Credit Bureaus.
In India, Credit Bureaus are the RBI authorized Companies that are registered under the Credit Information Companies Act, 2005. And different countries have different Acts under which Credit Bureaus are registered.
Credit Information Bureau India Ltd (CIBIL) is India’s premier Credit Bureau. Experian, HighMark, and Equifax are some of the other main Credit Bureaus in India. CIBIL Credit Score is mostly used by the lender as compared to the Scores of other Credit Bureau since it is the oldest Bureau in India.
What is considered a Good Credit Score?
In India, Credit Score lies between the range 300-900. The closer the score to 900, the better it is considered. A score between 300-549 is considered poor, anything between 549-700 is considered fair and a score above 700 is considered good.
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What are the key factors that influence your Credit Score?
There are 5 main factors that affect your Credit Score, they are as follows:
1) Payment History:-
The main question a lender as while lending a loan is that “will I get my money back?” and your payment history can help the lender to get an answer.
Your payment history plays a curial part in your Credit Score around 35% of your Credit Score depends on this. This component of the Credit Score depends on multiple factors like:-
- Did you pay your bill of any service or account on time or not. If you pay your bill late it can negatively affect your Credit Score. The more delay you make to pay the bills the worse it affects your Credit Score.
If any of your accounts have been sent to the collection then this is a big no sign for the lender.
2) Amount Owed:-
This is the second most important component of your Credit Score. This component shows the lender that how responsible did you utilize your Credit.
Any Credit Bureau will consider your credit utilization ratio while calculating your Credit Score. The credit utilization ratio is calculated by dividing the total credits you are currently using by your total credit limits.
If your credit utilization ratio is more than 30% of your total credit limits then it is not good for your Credit Score.
3) Length of Credit History:-
This component shows how long you hold your credit accounts. This includes the age of your newest credit accounts, the age of your oldest credit account, and the average age of your all credit accounts. The higher the length of your Credit History the higher is your Credit Score.
4) Credit Mix:-
While calculating your Credit Score the Credit Bureaus will also look at whether you have different types of credit like a car loan, educational loan, credit card, or any other kind of credit.
If you have a diversified portfolio of credit accounts then it will have a positive effect on your Credit Score.
5) New Credits:-
This component takes into account the number of new credit accounts you had recently opened or applied. There can be two types of inquiries in Your credit history, which are generally referred to as “soft” and “hard” inquiries. Soft inquiry checking your credit history, the soft inquiry doesn’t Affect Credit Score.
When you apply for a new credit account, the lender carries out a hard inquiry(hard pull), which is the process of checking your credit information. Large numbers of hard pulls can cause a decline in your Credit Score.
Now once you are aware of all the main factors that affect your Credit Score, it’s time to get in the main question of this article i.e. “How to improve your Credit Score or CIBIL Score?”
Steps to Improve Your Credit Score:-
1) Review Your annual Credit Report:-
Before finding the solution to the problem you need to know what is the problem, similarly before finding the solution to improve your Credit Score you need to know what are the factors that are affecting your Credit Score.
To do that you need to go through your annual credit reports from all the leading credit bureau in your country. In India, there are four major credit bureaus namely CIBIL, Experian, HighMark, and Equifax.
Analyze your annual credit report based on the factors mention above and try to figure out which factors are affecting your Credit Score.
2) Pay Your bills on time:-
As we discussed above that your payment history plays the most curial part in calculating your Credit Score. So it is very important to pay all your bills or any loan on time. If you pay off your debt on time then, it works in your favor.
If you fail to make payment before the due date then do it within 30 days or it will affect your Credit Score.
Use your Credit cards to pay your monthly bills, and also pay the Credit card bill before the due date to avoid the interest charges.
To do all your payments on time you can follow the following steps.
- Keep a record of all your monthly bill on paper or digitally. You can use different virtual wallets applications to record it digitally.
- Automate your bill payments from your bank account.
3) Keep Your Credit Utilization Ratio Within 30% :-
We had already discussed the Credit Utilization Ratio. It is the second component that affects your Credit Score the most. There are two ways by which you can control your Credit Utilization Ratio to be less than 30%.
The first and the simplest way is to use only up to 30% of your total credit limit and do the rest of the payment in cash. If you can’t do that then the other way is to customize your credit limits such that you only use up to 30% of it.
You can easily customize the credit limit of your credit card by applying online, you just need to update your annual income. If you have all the documents required then it will be approved within few minutes.
4) Don’t apply for too many new Credits at Once:-
Whenever you apply for any kind of new credit such as Credit cards, car loans, educational loans, etc. the lender from whom you are taking credit will generate a hard pull. We had already discussed what is hard pull is and its effects on Credit Cards.
If you have occasional hard pull in your credit history it will not affect your Credit Score but if you have too many hard pulls in a short period of time then it is harmful to your Credit Score. The lender might think that you need money because you are facing a financial crisis and therefore you are a risky option for them.
So if you want to improve your Credit Score then don’t apply for new credits for a while.
5) Diversify your portfolio of Credit accounts:-
Try to have varieties of credit products in your portfolio. We had already discussed the effect of having a good credit mix on your Credit Score and also it will increase the length of your credit history.
6) Don’t close your old Credit accounts:-
Since the length of your credit history is the key component of your Credit Score, it is important to have a good length of credit history. Therefore, if you have old Credit Accounts don’t close them even if you don’t use them because it will help you to build your credit history.
What to do if I am a Beginner and don’t have a Credit Score?
If you are a beginner and want to build your Credit Score, the following steps can help you:
1) Get a secure Credit Card:-
A secured credit card is the same as a conventional credit card. The only difference is that you have to deposit some amount generally equal to the card limit as security. This security deposit helps protect the credit card issuer if you default and make them comfortable to give you a credit card.
Use the secured card to do small payments and make sure you pay the credit card bill on time.
2) Become an authorized user:-
If your close one has a credit card, you could ask them to make you an authorized user. In this scenario, you get your card and are given spending privileges on the main cardholder’s account. In many cases, the credit card issuers report the authorized users to the credit bureaus, which adds to your credit history. Before becoming an authorized user make sure that the primary cardholder makes all the payments on time.
I think I had solved all your problems about your Credit Score. The main task is to figure out what is hurting your Credit Score, once you figured out that follow the appropriate step to improve your Credit Score.
The above mention steps may take time to reflect the effects depend on the situation so please be patient. If you have any doubt regarding your Credit Score fill free to comment below our team will try to clear your doubt as soon as possible.