Understanding Your CIBIL Score
Before rebuilding, it helps to know what you're working with. A CIBIL score is a three-digit number, ranging from 300 to 900, that summarises your credit history. Lenders in India use this score to assess your creditworthiness when you apply for a loan
or credit card. A score of 750 or higher is generally considered excellent, opening the door to quicker approvals and more favourable interest rates. Conversely, a score below 650 can make it difficult to secure credit. This score is primarily influenced by your repayment history, how much of your available credit you use, the types of credit you have, and how often you apply for new credit.
Pay Every Bill On Time
This is the single most important habit for a healthy credit score. Your payment history is the most significant factor in your CIBIL score calculation, accounting for a substantial portion of it. Late or missed payments, even by a few days, can negatively impact your score and stay on your report. To ensure you never miss a due date for your credit card bills or loan EMIs, set up automatic payments or calendar reminders. Consistently paying on time demonstrates to lenders that you are a reliable borrower, which is the foundation of a strong credit profile.
Manage Your Credit Utilisation Ratio
Your Credit Utilisation Ratio (CUR) is the percentage of your total available credit that you are currently using. It's the second most influential factor in your score. Lenders prefer to see a CUR below 30%. For example, if you have a total credit limit of ₹1,00,000 across all your cards, you should aim to keep your outstanding balance below ₹30,000. A high CUR suggests that you might be over-reliant on credit, which can be seen as a risk. To keep this ratio low, pay your balances in full each month or make multiple payments within a billing cycle. You could also request a credit limit increase on your existing cards, which can lower your CUR if your spending stays the same.
Regularly Review Your Credit Report
Errors on your credit report are more common than you might think, and they can unfairly drag down your score. These can include incorrect account details, payments marked as late when they were on time, or even fraudulent accounts opened in your name. You are entitled to a free credit report from each of the credit bureaus, including CIBIL, once a year. Make it a habit to check your report for any inaccuracies. If you find an error, dispute it with the credit bureau immediately. They will contact the lender to verify the information, and if confirmed, the error will be corrected, which could provide a significant boost to your score.
Limit New Credit Applications
While it might seem tempting to apply for a new card or loan to increase your available credit, doing so frequently can be counterproductive. Each time you apply for credit, the lender makes a 'hard inquiry' on your report. Too many hard inquiries in a short period can signal to lenders that you are in financial distress, which can lower your score. It's wiser to research and apply for credit strategically only when you truly need it. Avoid applying for multiple loans or cards at once to see which one gets approved. This behaviour can be a red flag for lenders.
Maintain a Healthy Credit Mix
Lenders like to see that you can responsibly manage different types of credit. A healthy 'credit mix' includes both secured loans (like a home loan or auto loan, which are backed by an asset) and unsecured loans (like credit cards or personal loans). Having a balanced mix shows financial maturity and can positively influence your score. However, this doesn't mean you should take out new loans just for the sake of it. This factor is less critical than timely payments and low credit utilisation, but it contributes to a well-rounded credit profile over the long term.
Don't Close Old Credit Accounts
The length of your credit history also plays a role in your score. An older credit account with a positive payment history is a valuable asset. Closing an old credit card, even if you don't use it often, can shorten your credit history's average age and potentially cause a dip in your score. It also reduces your total available credit, which can increase your credit utilisation ratio. Unless the card has a high annual fee, it's often better to keep the account open. You can use it for a small, recurring purchase and pay it off automatically to keep it active.
