Rahul (name changed) is now a successful businessman who runs a retail outlet in DLF Cyber City, Gurgaon. In his early 20s, he had a credit card and had defaulted payment on it, a couple of times. Recently, when he approached a bank to lend him working capital to expand his outlet, he was informed that his application failed to make the cut, because of his low CIBIL score.
Rahul was shocked to know the outcome as he wasn’t aware that a couple of missed payments in his youth could have such a drastic effect. There are several among us, who have been in the same boat as Rahul.
For those who are new to CIBIL, here’s a quick introduction:
Credit Information Bureau Limited, CIBIL in short, is an agency that has been existent since 2000. The bureau is responsible for assigning a three-digit numerical score to individuals based on their credit history. This includes payment and management of credit card bills, loans, and other products.
Almost all lenders, be it banks; NBFCs or digital lenders use this score to determine the creditworthiness of a borrower before they sanction a loan product.
Additionally, a CIBIL score also plays a vital role in determining the interest rate fixed by the lender. When you have an excellent to high CIBIL score, you’re likely to enjoy better interest rates. On the other hand, a poor credit score equates to higher interest rates and more financial burden.
So, it’s imperative that you have a high CIBIL score when applying for business loans and other types of loan products.
Here are a few ways to improve your Credit Score
1. Make Timely Payments
While this may sound basic, it’s one of the most crucial elements. Cultivate a habit of making credit card payments and loan EMIs, well before the deadline, say around five days before the due date. Set up an ECS withdrawal option on your account, so payments are made automatically, and you don’t miss out on them.
2. Don’t Carry Around Plenty Of Plastic
There’s no arguing the fact that credit cards indeed are a huge convenience. But, instead of having a dozen credit cards in your wallet, stick to a couple that you use regularly. Just because a bank offers you free credit card don’t opt for one. This is because when you have plenty of cards, you run the risk of missing out on payments.
3. Don’t Apply For Loans At Several Lenders
When you apply for a loan from multiple lenders, each of them makes a separate inquiry to find out your CIBIL score. Whenever a bank or any other lender enquires, it is reflected in your CIBIL score. The more number of hard enquiries, the lower is your score.
So, it makes sense to avoid multiple hard enquiries for your credit report. On the other hand, when you check your CIBIL score directly with the bureau or any other authorized agency, it’s considered as a soft enquiry and doesn’t impact your score.
4. Extend Your Credit Card Limit If Possible
A higher credit limit keeps your credit utilization rate low. This boosts your credit score considerably as credit utilization is a significant factor in your CIBIL score calculation. However, keep in mind that just because your credit limit is extended, if you use up the entire amount every month, your credit utilization score will remain high.
5. Opt For A Secured Credit Card
A secured credit card is a blessing in disguise for individuals who are looking to boost their credit score. It is backed by a fixed deposit and therefore carries minimal risk. Also, when you apply for a secured credit card, banks don’t carry out any credit check; thereby it does not impact your CIBIL score.
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6. Above All, Borrow Only When Absolutely Needed
Today, the lending market is flooded with several lenders and an endless array of loan products, making loan availability easier than ever before. It’s easy to be tempted and borrow more than required than what one can afford. Always remember that your EMI payments shouldn’t exceed 40–50% of your total income.
The Bottom Line
Building your CIBIL score is a lot like losing weight. There are no quick fixes and magic potions. It requires time, commitment and dedication. With that said, you can fix even a poor credit score with the right methods. Use the steps listed above and watch your CIBIL score climb higher within 4–12 months.