A three-digit number is assigned to you based on your credit history, credit profile, and credit report. A higher CIBIL score indicates that the individual has a credit history and has displayed financially disciplined behaviour through this period. 

If you have a good credit score, this signals to lenders that you have a history of paying back your dues on time. This will make lenders view you as a low-risk borrower, which would not ensure that you’re able to get loans and credit cards easily which will help you further build your credit score, but will also give you better negotiating power when you’re trying to avail credit. 

We know that a good credit score is great for your financial well-being. However, you may be wondering what leads to a good credit score. Several things credit ranking agencies will take into account while calculating your CIBIL score. Here are some factors that are generally considered while computing your CIBIL score: 

Credit Utilisation Rate 

Credit utilisation rate or ratio is the ratio between the total credit extended to you and the credit utilised by you. In simple terms, if your total credit limit is ₹2 Lakhs and you use the entire credit limit during your billing period, your credit utilisation rate will be 100%. This may be alarming to many lenders as this indicates that you rely heavily on credit to meet your expenses. Generally, a credit utilisation rate of 30% is considered ideal, particularly if you’re looking to improve your credit score. If you’re looking to make sweeping changes to your credit score or want to maintain an exceptionally high credit score, then you should consider keeping your credit utilisation rate between 10% to 20%. 

Repayment History 

Credit ranking agencies will analyse your repayment pattern thoroughly to understand your financial position. If you’ve defaulted on any payments that have been reported to the credit bureau, then this will hurt your credit score. It is also important to bear in mind that having no credit history might be just as bad for your credit score as having a bad credit score. This is because a lack of credit history means that neither the lender nor the credit bureaus can ascertain your financial habits. This will make them view you as somewhat of a wild card who can default on payments. Many creditors may not want to take that risk and will likely reject your application which will drive your credit score further down. 

Secured vs Unsecured Loans 

Generally, secured loans reflect better on borrowers than unsecured loans. This is because secured loans are harder to avail and secured loans usually indicate that the borrower has assets in proportion to their borrowing. Having a high percentage of unsecured loans also signals lenders that you may be overly reliant on credit for your day-to-day expenses, which may indicate that you have bad money management skills. 

Credit Inquiries 

There are two types of credit inquiries - hard inquiries and soft inquiries. A hard inquiry is when a lending institution requests a credit ranking agency to analyse your credit report to help determine whether or not they should extend credit to you. On the other hand, a soft inquiry is when you ask for your credit report from a credit ranking agency to know your credit score. 

In case several hard inquiries are conducted against you in a short amount of time, then this may signal to lenders that you are desperate for credit. Many loan and/or credit applications also signal that you might be in constant need of funds which shows that you might have poor money management skills. 

Bear in mind that soft inquiries will not affect your credit score in any way, so you can safely get a free CIBIL report from time to time to understand your credit score better. 

Now that we’ve understood the factors that are considered to arrive at your credit score, let’s go through some simple steps and habits that you can employ to improve your credit score: 

  1. Pay off any existing revolving debt that you may have. Ensure that all of your payments are made in full promptly. Making minimum payments can hurt your credit score in the long run. 
  2. If you don’t already have a credit card, consider getting one. If you’re finding it difficult to get a credit card owing to a bad credit score or a non-existent credit history, then a secured credit card that’s offered by many leading banking institutions may be a great option for you. 
  3. If you’re trying to build your credit score from scratch, consider taking out a consumer durable loan. Consumer durable loans are easier to avail than other similar loans and are generally way lesser in ticket size than traditional loans. Ensure that you pay your all EMIs in full on time, this will help you build a good credit history. 
  4. Don’t apply for too many credit cards, particularly if there are chances that your loan application might get rejected.  
  5. If your credit score is low, consider holding off on taking major loans till your credit score improves. 

Having a low credit score or no credit history can hurt your finances. However, it is not the end of the world. Just be patient and make good financial decisions and your credit score is sure to improve. 

Generally, CIBIL will maintain your credit score for 7 years but gives a month-by-month repayment record for 36 months. So, if you start making improvements to your financial habits and your credit score will start improving significantly past three years.