A CIBIL score is an important factor that helps you get access to credit products like loan and credit cards. Lenders such as banks and other financial institutions prefer a CIBIL score above 750 for lending purposes. There are several factors that may affect the CIBIL score of an individual, such as your income, age, and job stability, among others.Read on to more detail about the considerable factors that affect your CIBIL score.
What is a CIBIL score?
A CIBIL score is a numerical representation of your ability to repay the credit. It is a three-digit number that falls in the range of 300-900. A score closer to 900 can get you better deals on credit cards and loans. Majority of lenders like banks and non-banking finance companies (NBFCs) prefer a CIBIL score of 750 and above.
Check your Credit Score
Who Calculates your CIBIL score?
TransUnion CIBIL credit bureau calculates CIBIL scores after taking into consideration several factors including payment history, credit type, the age of the credit, and other factors.
What are the Factors that Affect your CIBIL score?
A CIBIL score is made up of four main factors:
| Payment History | 35% |
| Owe to lenders | 30% |
| Credit Type and Duration | 10% to 15% |
| Credit Mix | 10% |
Let’s take a look at some of the major factors that can affect your CIBIL score negatively:
- Irresponsible Payment Behaviour:
- High Credit Utilisation Ratio:
- Outstanding Debt:
- Paying only the Minimum Amount Due:
- Making Multiple Credit Applications:
- Errors in your CIBIL Report:
- Not Having a Credit Mix:
- Length of the Credit History:
- Closing old Credit Card Accounts:
Your payment history has the biggest influence on your score. It is important to pay your credit card bills and loan EMIs on time every month. As per a CIBIL analysis (reported by the Financial Express), a 30-day delinquency can reduce your score by 100 points. If you have multiple credit cards as well as loans, it is advised to set up reminders and alerts, to avoid missing payments or delaying them. Any missed or overdue payments reflect poorly on your score and suggest that you are not consistent with repaying credit.
One of the golden rules you should follow is to keep an eye on your credit utilisation ratio. It is the amount of credit used in proportion to the credit limit available to you. According to experts, you should ideally not exceed using 30% of your credit limit. For example, if your credit card limit is Rs.1 lakh, you should spend around Rs.30,000. If you have used over 50% of your credit limit, it can have a negative effect on your score. Having a high credit exposure will send a red flag to lenders as it indicates you are at a higher risk of defaulting.
You should always make sure to clear off your outstanding debts. When you have unpaid dues reflected on your credit report, it takes a toll on your score. It is advised to pay off the outstanding dues even if the amount is small.
A minimum amount due is a small portion of the principal that is outstanding every month. You may fall into a debt trap if you constantly pay only the minimum amount due. Rolling over the debt by paying only the minimum amount leads to the interest compounding on your outstanding balance. So, it is advised to pay your credit card bills in full. It also reflects poor repayment behaviour.
When you apply for a loan or a credit card, lenders will want to check your creditworthiness and they’ll do this by pulling out your credit report. This is called a hard inquiry. If you send out multiple applications, it will mean that multiple credit inquiries are occurring around the same time. These hard inquiries are reported and affect your score negatively. It will make you look credit hungry.
If your loan or credit card application has been rejected recently, it is advised to not apply for credit immediately. It is better to improve your CIBIL score and then apply again.
Your CIBIL report has a detailed record of your current as well as past credit accounts. If there are any errors in your report, it can hamper your score. So, if you any discrepancies in your report, you must get them rectified immediately.
These errors have to be rectified by your lenders only. CIBIL does not correct reports without lenders reporting the changes to be made.
Also, checking your credit report can also help you identify if you are a victim of an identity theft.
It is important to maintain a healthy balance of secured and unsecured loans. Home loans and auto loans are examples of secured loans while a credit card is an example of an unsecured loan. If you have a high number of only one type of credit, it can affect your score. Also, when you have a healthy mix of different types of loans, it suggests that you have experience in handling both different types of loans. This is considered desirable by lenders.
In simple terms, credit history means the total number of years that have passed since you have first opened a credit account. If you have a long credit history, it helps lenders take a sound decision at the time of offering you credit. It is better to focus on building a credit history in the earlier stage of life as, by the time you apply for a home or car loan, you will have a good record of credit transactions.
Credit cards are a great tool to build credit history. However, when you close your old accounts, you end up losing a long credit history associated with it. Therefore, if you have used the card for a substantial number of years, it is advised to keep it open as long as possible, if feasible. Consider closing a card that is relatively new.
Benefits of Having a High CIBIL score
- Quicker approval for loans and credit cards
- Cheaper interest rates on loans
- Better deals on credit cards
- Credit cards with higher credit limit
- Discount on processing fee and other charges for loan applications
It is important to check your CIBIL score from time to time. Make sure your score is above 750 to enjoy better access to credit products. You are entitled to receive one detailed credit report for free from CIBIL per calendar year.
Check your Credit Score
Hard Inquiry
A hard inquiry occurs when you apply for a loan or credit card, granting the financial institution permission to assess your credit report to evaluate your 'creditworthiness.' Potential lenders use credit reports to evaluate the likelihood of you repaying borrowed funds. A positive credit history showcases responsible financial behaviour, making lenders more inclined to offer you a new credit card or loan.
When a financial institution or bank accesses your credit report from one of the four main credit bureaus (Equifax, Experian, TransUnion CIBIL, or CRIF Highmark), it is termed a hard inquiry. Each instance of a hard inquiry results in a slight decrease in your credit score, irrespective of whether you receive credit approval. In contrast, if you personally check your credit report or undergo a prequalification process, it is considered a soft inquiry, having no adverse impact on your credit score.
What Prompts a Hard Inquiry on Your Credit Report?
A hard inquiry is recorded on your credit report if you have:
- Submitted an application for a new credit card within the last two years.
- Applied for a new loan, including personal loans, car loans, home loans, education loans, mortgage loans, etc.
- Requested a balance transfer card or loan.
- Applied for a business credit card.
- Applied for a credit limit increase.
How Hard Inquiry Affects Credit Score?
Credit bureaus only consider inquiries from the past 12 months when computing your credit score, even though hard inquiries remain on your credit report for more than two years. The effect of a hard inquiry on your credit score is also influenced by your credit history. If you possess a robust credit history and score before seeking new credit, a fresh, hard inquiry may have minimal or no adverse effects on your credit score.
It is observed that hard inquiries can significantly impact the credit scores of individuals with a short credit history or limited credit accounts. Therefore, if you are in the early stages of building your credit, a hard inquiry could potentially cause more harm to your credit score compared to someone with an extensive credit history. However, this doesn't mean avoiding credit applications altogether. It's acceptable to have occasional inquiries as it demonstrates an effort to establish credit. Just be cautious and only apply for a few credits in a short period.
Lender's Perspective on Encountering a Hard Inquiry
While hard inquiries are deemed less impactful in credit score calculations, they hold substantial weight in evaluating your likelihood of timely debt repayment. This is why lenders consistently review your credit report to gauge your creditworthiness. An excess of hard inquiries indicates potential financial strain, suggesting a heightened risk for future borrowing. Nevertheless, lenders take into account additional factors, including your income and payment history, when deciding to approve or reject your credit application.
How to Reduce Number of Hard Inquiries?
While hard inquiries aren't always detrimental, as they might cause a temporary credit score dip, it's advisable to understand how to minimise their occurrence. Here are a few considerations to keep in mind:
- Avoid applying for multiple credit cards in a short timeframe. Consider spacing out applications, aiming for a new credit card every six months.
- Apply only for credit cards aligned with your financial needs. Avoid accumulating hard inquiries for cards you do not genuinely require.
- Check your credit score and your credit report before you apply for new credit. Ensure you meet eligibility criteria by reviewing your credit score and report in advance.
- Explore prequalification options. Evaluate your creditworthiness without affecting your credit score by applying for prequalification before seeking new credit.
Check your Credit Score for Free
FAQs on Major Factors That Affect Your CIBIL Score
- What can negatively impact your credit score?
- What habit lowers your credit score?
- Does paying interest affect credit score?
- Does bank balance affect credit score?
- Do debit accounts affect credit score?
- What helps raise your credit score?
- Why is my credit score going down when I pay on time?
- Do overdrafts affect credit score?
- Does standing order affect credit score?
- How can I improve my credit score naturally?
- Is it possible for CIBIL to have incorrect information about a person?
- Is it true that employers are looking at CIBIL scores these days?
- Is it true that my employer's credit history will affect my eligibility for credit?
The practice of delayed payments of debts impacts your credit score negatively and significantly drops your credit score.
Clearing payments constitute 35% of your credit score. Missing payments are one of the habits that influences your credit score negatively.
Interest paid on loan or on credit card transactions are not considered while calculating your credit score, and hence, it has no impact on your credit rating.
The bank account details do not reflect on your credit report and hence, it has no direct impact on the credit score. But the lenders do keep track of your spendings, assets and other information related to bank account balance to figure out whether you are capable fo taking debts.
No, debit card transactions such as withdrawal from debit accounts do not affect your credit score. This is because debit card transactions are not a form of credit, and hence, it does not get reported to credit bureaus and does not impact the credit score.
Some of the significant factors that help raise your credit score are clearing payments on time; avoid creating new accounts frequently; paying the revolving account balances; tracking and catching-up the past due accounts; and create your credit file.
Paying off debts affects certain parameters such as credit utilisation ratio, credit mix, or the length of your credit history. Your credit score may drop after clearing off your debts on time if these parameters are affected.
Yes, overdraft affects the credit score negatively if you fail to deal with it properly. Going beyond the overdraft limit will prove to the lenders that you are financially struggling, and it will bring down your credit score.
Standing order and insufficient funds in your account can impact your credit score negatively. This will not only affect your credit rating but will also make future borrowings way more difficult.
The best way to improve your credit score naturally is to improve your payment history by clearing all your payments on time. Try to at least clear the minimum amount in case you are unable to pay the entire amount.
Yes, there have been cases reported where people have had their loan applications rejected despite having performed well with debt in the past. This is because banks and lenders sometimes erroneously give the wrong information to credit bureaus, who use the wrong information to generate credit scores. It is possible to have this information corrected by contacting the bank and the credit information bureau.
Yes, employers are considering the CIBIL score of a candidate as a measure of stability and reliability. Having a good CIBIL score these days not only helps you get a loan, but also a job.
If the company you work for has defaulted on loans and has dishonoured debt in the past, lenders will have blacklisted it. If you apply for a loan and mention that you’re working for a blacklisted company, lenders will reject your application on the basis that you don’t have a stable job. This is no fault of your own, but lenders will tend to look at applicants who pose the least risk in terms of dishonouring the loan. This is a rejection by association.
Read More on CIBIL
- Tread with caution before co-signing a home loan
- CIBIL TransUnion Score 2.0 What is Considered as a Bad Credit Score
- Good Mix of Credit Can Boost Your CIBIL Score
- Having a high CIBIL score can get you a lower rate of interest
- Ways to rebuild your CIBIL Score after bankruptcy
- How Credit Information is important
- CIBIL Score Report
- Hidden facts about CIBIL Score
- CIBIL
- Credit Healthy during the COVID-19 Crisis
Know More About CIBIL
TransUnion CIBIL is one of the leading credit information companies in India. The company maintains one of the largest collections of consumer credit information in the world. CIBIL Score plays a key role in the lives of consumers. Banks and other lenders check the CIBIL Score of the applicants before approving their loan or credit card application. Consumers can visit the official website of CIBIL to check their CIBIL Score and Report. CHECK YOUR CIBIL SCORE now.
