CIBIL Score Explained: What it Means? And How It Helps to Improve Your Financial Health?

CIBIL Score Explained: What it Means? And How It Helps to Improve Your Financial Health?

Meet Z, a diligent young professional working in Kolkata. Like many of his peers, Z was excited about his financial independence. However, there was a term that kept popping up – CIBIL score. He had heard about it in passing conversations, but the concept remained a mystery until one day when he decided to unravel its significance.

What is CIBIL score?

CIBIL full form is Credit Information Bureau (India) Limited. This is a three-digit number ranging from 300 to 900 that reflects an individual’s creditworthiness. It is a numerical representation of his credit history, repayment behavior, and overall financial health. To put it simply, the higher the score, the better his chances of getting credit or loans at favorable terms.

Importance and lender’s interest

Z soon realised that his CIBIL score was like a financial report card. Lenders, such as financial institutions and banks, use this to evaluate the risk linked with lending funds to him. For example, when he placed an application for a 4-wheeler loans, the bank would examine his score to understand whether he had the chance of repaying the loan timely. A higher score indicated responsible financial behavior, making him a trustworthy borrower in the eyes of lenders.

Z’s exploration into credit score improvement

Intrigued by the impact of his CIBIL score on his financial prospects, Z set out to improve it. He started his financial discipline journey to increase his credibility. Mentioned here are some valuable lessons he got to know –

25 points to elevate your CIBIL score

Maintain low credit utilisation

Keeping credit utilisation below 30{23964f9fbfd1c4fba291e8c0b43d61a6bc7e9e00fb9015afcc2a49cc1d2d5459} of the credit limit is advisable. Z regularly checked his credit card balances and ensured they stayed well within this limit.

Timely bill payments

Paying bills, including credit card dues and loans, on time showcases reliability. Z set up reminders to ensure he never missed a payment deadline.

Don’t default

Avoid defaulting on loans, as it severely damages your score. Z understood that defaulting could lead to legal actions and a significant decline in his score.

Long credit history

A longer credit history demonstrates stability and responsible behavior. Z refrained from closing old credit accounts to maintain a positive credit history.

Diverse credit mix

Having a mix of secured (e.g., home loan) and unsecured (e.g., credit card) loans is beneficial. Z diversified his credit portfolio by taking a small personal loan alongside his credit card.

Regularly check your CIBIL report

Identify errors or discrepancies that could negatively impact your score. Z obtained a free credit report annually and corrected inaccuracies promptly.

Maintain stable employment

A steady job history reflects stability and repayment capability. Z ensured his career path showed consistent progress, boosting his creditworthiness.

Limit new credit applications

Numerous applications in a short time can signal financial distress. Z applied for new credit only when necessary, avoiding unnecessary inquiries.

Close dormant accounts

Unused accounts can be closed to simplify your financial profile. Z closed accounts he no longer used to streamline his credit history.

Avoid settlements

Settling debts for less than owed can hurt your creditworthiness. Z understood that settled accounts could have a negative impact on his credit report.

Joint accounts wisely

Be cautious about co-signing loans, as both parties’ scores are affected. Z carefully considered the implications before sharing financial responsibilities.

Correct loan closure

Ensure proper documentation when closing a loan to prevent errors in your report. Z double-checked with his lender to ensure all paperwork was accurate upon closing a loan.

Use credit monitoring services

Keep track of your score to detect any unusual changes. Z subscribed to a credit monitoring service to receive alerts about any changes to his credit profile.

Regularly update contact information

Lenders need accurate details to communicate regarding payments. Z kept his contact information up to date to avoid missing any important notices.

Restructure debt

Consider consolidating high-interest debts to manage repayments better. Z consolidated some of his high-interest loans into a single, more manageable loan.

Avoid maxing out credit cards

High credit card balances negatively impact your score. Z kept his credit card balances comfortably below the credit limit to demonstrate responsible usage.

Negotiate with lenders

If facing financial difficulty, speak to lenders about modified payment terms. Z communicated openly with lenders during tough times, seeking feasible solutions.

Stay away from multiple balance transfers

Frequent transfers can raise red flags for lenders. Z understood that too many transfers could make him seem financially unstable.

Opt for secured credit cards

If rebuilding credit, secured cards can help demonstrate responsible behaviour. Z obtained a secured credit card and used it judiciously to rebuild his credit history.

Maintain low outstanding debt

Reducing overall debt burden has a positive impact. Z worked on reducing his outstanding debts steadily over time.

Attend financial literacy workshops

Enhance your knowledge to make informed financial decisions. Z attended workshops and seminars to stay updated on financial management.

Monitor joint accounts

Be vigilant if you have joint accounts with someone whose financial behaviour is questionable. Z kept an eye on joint accounts to ensure his credit was not negatively impacted.

Patience and consistency

Improving your credit score takes time; be persistent in your efforts. Z remained patient and consistently followed these practices to witness gradual improvements.

Keep loan accounts open

Closing accounts might reduce your available credit, affecting utilisation. Z kept his older loan accounts open to maintain a favourable credit utilisation ratio.

Pay attention to settlements

If you negotiate a settlement, ensure it is reported correctly. Z confirmed that any settlements he negotiated were accurately reflected in his credit report.

Through Z’s determined efforts and these 25 insights, he not only improved his CIBIL score but also transformed his financial health. His journey was a testament to the power of understanding and utilising this three-digit number effectively. As Z continued to make informed decisions and nurture his creditworthiness, he discovered that the CIBIL score was more than just a number; it was a key to unlocking a world of financial opportunities and security in dynamic economic landscape.