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Mechanism of the Credit Score

Credit scores are generally express as a three-digit number ranging from 300 to 900 (with 900 being the absolute highest score) and are base on a person’s repayment history, credit files, loan history, and other criteria.

Banks and other lending institutions will look at this score when you ask for a loan to determine your credit risk. Credit Score impacts whether you will be approved for a loan by assessing your likelihood of paying your bills on time.

Your credit score has an impact on the quantity of money you can borrow as well as the interest rate you’ll pay. If your credit score is really low, your loan application may be denied.

What factors go into calculating the CIBIL Score?

The CIBIL Score is calculated using a formula that is exclusively based on the repayment history and records of a person’s loans and credit cards. These six things have a significant impact on your CIBIL results and should be avoided at all costs-

Combination of Credit

You should have a healthy mix of secured (such as mortgages and vehicle loans) and unsecured credit ( such as personal loans, line of credit). It can help you improve your CIBIL score.

Debt-to-Income Ratio

Keep your debts, such as credit card bills and mortgage payments, below 50% of your income to improve your credit score. If you have a higher ratio on your credit report, it will have a significant impact on your credit score.

Repayment History

Make certain that you pay your EMI payments on schedule. Late payments and defaults might affect your CIBIL score negatively. Foreclosure, insolvency, or a collection account owing to missed payments all have an immediate impact on your CIBIL score. This demonstrates to your potential lender that you are unable to manage your finances, making it more difficult for them to get their money back.

Excessive use of credit cards 

A large credit card balance indicates a large repayment obligation, which can lower your CIBIL Score. Do not use too many credit cards as it will make you a credit-hungry person in front of lending companies. 

Several Requests for Information

If you’ve recently applied for or been approved for a number of loans and credit cards, lenders may scrutinize your credit profile with caution, as many credit applications signify your financial burden.

Maintaining a positive credit history, which is required by lenders for loan approval, may help you improve your CIBIL Score. To help you increase your score, follow these six steps:

Always make on-time payments: 

Lenders frown upon late payments. Keep your balance low. Keep your credit use under check and don’t overextend yourself with credit.

Maintain a balanced credit portfolio:

It is better to have a decent mix of secured (home loan, auto loan) and unsecure loans (such as personal loan, credit cards). A significant number of unsecured loans could be consider as a disadvantage.

On a monthly basis, keep track of your co-signed, guarantee, and joint accounts: Miss payments are held equally responsible in co-sign, guarantee, or jointly held accounts. The carelessness of your joint holder (or guaranteed individual) may jeopardize your capacity to obtain credit when you need it.

Throughout the year, review your credit report on a frequent basis:

To avoid unpleasant surprises like a loan application rejection, keep track of your CIBIL Score and Report on a regular basis.

In conclusion

CIBIL scores are incredibly crucial when it comes to taking out loans. When you apply for a loan or best credit cards in India, the lender will retrieve your credit report to determine your creditworthiness.

You have a better chance of getting a loan if your CIBIL score is higher. You can also make a case for more favorable loan terms and cheaper fees and charges.

However, if your CIBIL score is low, your chances of getting a loan accept are small. However, if you meet other loan eligibility requirements, the lender may be ready to issue you a loan.

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