What is a CIBIL Score (+ 7 Tips to Improve Your Credit Score)

What is a CIBIL Score (+ 7 Tips to Improve Your Credit Score)

A credit score is basically a numerical representation of your “creditworthiness”. It tells banks, credit card companies and other lenders about your financial history, in terms of making payments for loans or other lines of credit. This helps them judge whether you are capable of repaying a loan on time.

In the United States, there are three major credit bureaus: Experian, Equifax and TransUnion.

These agencies collect information about an individual’s credit history and use it to generate a credit report. This report is the financial data used to calculate your credit score and the risk a lender will take in loaning you money.

In order to improve your credit score, you first need to understand why it matters.

Why Is Your Credit Score Important?

When you apply for a credit card, personal loan, home loan or any other line of credit, your credit history and score will play a huge role.

If you have a high credit score, you’re far more likely to receive approval from a loan provider at lower rates of interest.

In a nutshell, your credit score helps to determine:

  • Whether your application for a loan or credit card is accepted
  • How much credit can be safely extended to you by a lender
  • Interest rates you will be charged on any loan product

Your credit score is also taken into account by property owners and realtors when you’re looking to rent a home, as well as insurance providers when you apply for a policy.

It is generally believed that a higher credit score means fewer claims, so you may get lower rates on your auto insurance, homeowner’s insurance, etc.

What Is Considered a Good Credit Score?

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Your credit score will be a three-digit number between 300 and 850, with anything under 660 being considered poor or bad.

While the average generally falls somewhere between 660 and 719, you should aim to score over 720 if you’re looking for a loan or credit at affordable rates.

A small percentage of the U.S. population, around 14%, has no credit history at all. This could be because they have never opened a bank account, used a credit card, just started working, etc.

Being ‘credit invisible’ can make it difficult to get an apartment, a credit card, insurance coverage and more.

If your score is too low for you to get a loan, or you want to build it up to get better rates on your credit card or insurance, there are a few ways to improve it.

Even if you’ve never taken a loan or line of credit before, you can start building your credit score before you plan to apply for one!

7 Ways to Improve Your Credit Score

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Here’s how to build and improve your credit score:

1. Limit Credit Card Spend

Keep your spending on credit cards to 50% or less of each card’s limit and your overall limit, for a positive score.

Also avoid out-of-pattern spending as far as possible, e.g. suddenly charging $20,000 on a card where you usually spend only $5,000 a month or making multiple cash withdrawals in a short timeframe.

2. Pay Your Debt on Time

Whether it’s credit card bills, EMIs for a loan or even your phone and utility bills, make sure you get into the habit of making payments on time.

A history of late payments negatively affects your credit score, especially if this happens on a frequent basis. Use a calendar and reminders to stay on track.

3. Monitor Your Credit Score

You can access your credit report through any of the three major credit bureaus. Even if you aren’t looking for a loan, it helps to have an idea of how creditworthy you are.

Checking your credit report can also help you discover why applications are being rejected and plan your finances more carefully so you can improve your credit score.

4. Consolidate Your Debt

If you have high outstanding balances across multiple credit cards or loans, bring them all together under a single roof.

Using a low-interest personal loan or line of credit can help you manage repayments more effectively, pay less interest and reduce the overall impact of high levels of debt on your credit score.

5. Avoid Multiple Applications

By this we mean you shouldn’t apply for multiple credit cards or unsecured loans in a short period of time.

While applying for more than one line of credit simultaneously doesn’t have a very major impact on your overall score, it can make you seem like a high-risk borrower to any bank or credit card provider.

6. Improve Your Credit Mix

You shouldn’t apply for a loan or credit card you don’t need. At the same time, remember that diversified borrowings can help improve your credit score.

Lenders will react more positively if you have a mix of credit accounts such as home loans, car loans and credit cards, but only if you also have a history of making repayments on time.

7. Don’t Cancel Old Cards

When you pay off a credit card or loan, don’t be in a hurry to have it removed from your credit report.

It’s actually more helpful to have a history of timely repayments on your report than no history of a certain line of credit at all.

Instead of canceling old cards, leave them on the report to boost your credit score.

Your credit score won’t change overnight. However, every step you make to improve it will help in the long run!

About The Author

Shiv Nanda is a financial analyst who currently lives in Bangalore, India (refusing to acknowledge the name change) and works with MoneyTap, India’s first app-based credit line. He is a true finance geek who enjoys helping people with money management, and his friends love that about him.

A credit score shows how creditworthy you are. In order to improve your credit score, you first need to understand why it matters. #creditscore #moneymanagement #cibilscore

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