Maintaining your CIBIL score after taking out an instant loan
The most well-known of the four credit information organizations licensed by the Reserve Bank of India is the Credit Information Bureau India Limited (CIBIL). The RBI has also licensed three more organizations such as Experian, Equifax, and Highmark, to operate as credit information companies. The CIBIL score, on the other hand, is the most widely used credit score in India.
Let’s move to understand what a CIBIL score signifies.
CIBIL keeps credit records of about 600 million people and 32 million enterprises. CIBIL India is a subsidiary of an American multinational, TransUnion, thereby lending the name of CIBIL TransUnion score to credit scores generated through CIBIL in India. This CIBIL Score returns as -1 for someone without any credit history, while for persons with credit history, it varies within the range of 300 to 900. This three-digit score is a numerical summary of your credit history, rating, and report. A higher credit score indicates a better credit rating and repayment discipline.
What do CIBIL’s credit history and credit report mean?
Credit history is a detailed record of a person’s past and present debts and their associated repayments. A credit report is derived from numerous sources such as banks, credit card companies, NBFCs, collection agencies, and government records. The credit score report of a borrower is the output of a mathematical algorithm that uses credit information to forecast how creditworthy you are.
A CIBIL credit score takes time to build, and it often takes up to 18 to 36 months or greater credit usage to achieve an acceptable credit score. To learn more about your existing credit score and the factors affecting it, you can use a CIBIL score-checking app.
Why is the CIBIL credit score important?
The CIBIL score is a vital aspect of any loan assessment procedure. When someone applies for a loan with a bank or financial institution, the lender initially looks at the applicant’s CIBIL score online. A poor CIBIL score may prompt financial institutions to reject applications entirely, which also impacts the score. If the CIBIL score is high, the lender will investigate the application and examine additional factors to determine whether the applicant is creditworthy.
The higher the CIBIL score, the better your chances of the loan being evaluated and sanctioned. The choice to lend is entirely up to the bank, and CIBIL has no say in whether or not the loan should be approved. A minimum CIBIL score of 700 is generally regarded as suitable for getting a personal loan.
So, if you want to maintain your CIBIL score after a personal loan, some key steps to take are as follows:
- Pay all your bills on time
- Keep your credit usage ratio low
- Make no immediate loan inquiries
- Build a credit history
Apart from these factors, let’s look at other ways to maintain your CIBIL score following taking out an instant loan.
1. Set reminders to pay back on time
Missing out on debt repayments can be a costly error, negatively impacting your credit score. In the case of regular monthly repayments, also known as EMI, regularity, and punctuality of repayment are a must. If you miss an EMI payment, you will not only incur additional charges in the penalty, but your credit score will suffer as well. Set reminders and manage funds to ensure timely repayment under all circumstances.
2. Examine your credit report for errors
You may believe you have a decent credit history, but there could be a number of undetected inaccuracies lowering your credit score. For example, sometimes even after paying your debt in full and closing it on your end, it remains listed as current, owing to administrative bottlenecks. Similarly, you must keep an eye out for other faults and questionable activities. If you correct these mistakes, your score will immediately improve.
3. Maintain a balanced credit mix
It is usually a good idea to have a decent mix of unsecured loans, such as credit cards and personal loans, and secured loans, such as a vehicle loan or a home loan. Individuals with a higher number of secured loans are preferred by lenders, and credit bureaus give them a favorable credit rating. If you have more unsecured loans than secured loans, attempt prepaying your unsecured debts to maintain a healthy mix.
4. Pay off your credit card debts
Any lender desires healthy and disciplined financial behavior, and paying off all of your credit card debts is a great way to make a positive impression on potential lenders. Plan ahead to pay off your credit card debt and enhance your credit score.
5. Avoid taking out multiple loans at once
To protect your credit score from falling too low, repay your present debt before taking out another. Taking out multiple loans at once indicates that you may not have enough money to repay them. It is preferable to take out only one loan at a time and properly repay it in order to improve your credit score.
6. Keep your credit utilization ratio to a minimum
One approach to boost your credit score is to avoid using your credit card to its maximum limit after taking out an instant loan. It is recommended to keep the credit utilization percentage low, preferably below 30%.
7. Select a longer tenure
When taking out a loan, choose a lengthier repayment period. This way, your EMI will be modest, and you will be able to make all of your payments on schedule. This reduces your chances of falling into the list of defaulters and automatically works to boost your score.
8. Increasing your credit limit
Never say no if your bank asks you to extend the credit limit on your card. It does not imply that you will have to spend more money every month, but rather that you will have to manage your costs more carefully. The easy trick is to have a lot more credit and maintain low utilization levels to improve your credit score.
There’s no chance of your credit score improving overnight. Achieving a strong CIBIL score requires persistent effort. Following taking out an instant personal loan, a healthy credit score is a must, as credit underwriting engines factor in credit scores as an essential aspect of loan appraisal. Maintaining a good CIBIL score is even more critical after availing of a loan, as even minor irregularities in repayment may adversely impact credit scores and, in turn, future lending capacity. You must be diligent and examine your credit report, spending habits, and timely debt payments at regular intervals. It helps to increase your credit score and creditworthiness over time.