What is a Credit score and why is it important?

Credit score is the most important aspect in the business of lending. In simple terms, it is a score of through which a lender gauges the repayment capacity of the borrower. Credit score, a three-digit number, is calculated after taking a number of factors into consideration to determine your creditworthiness.

Depending on your credit score, a lender, which could be a bank or financial institute or any other lending body, would decide to process your loan. A good credit score not only helps in getting you the required loan amount but can also help you in getting a loan at a cheaper interest rate.Hence, having a good credit score is extremely important as not only does it determine your financial creditability but also access to credit on terms and conditions favorable to you is determined based on this 3 digit number.

What is CIBIL score?

In India, the credit score of an individual is provided by CIBIL, which is prepared from the Credit Information Report. Credit Information Bureau India or CIBIL, established in the year 2000 and governed by the RBI, is the first company in India which collects and maintains credit information of individuals as well as commercial entities. CIBIL receives information from various banks and financial institutions monthly and on the basis of information provided it generates the credit score of an individual.

CIBIL score can be anywhere in the range of 300 to 900, and a score closer to 900 is considered good score.

Several factors are considered while calculating one’s score which includes:

Repayment of previous debt: How you service your previous debt is an important factor in deciding your credit score. Defaults and delayed payments of EMIs, credit card dues, and other such loans affect your CIBIL score negatively.

Increasing your Credit Limit:  Increasing the credit limit means you are increasing your loan burden, and this, in turn could impact your CIBIL score negatively. If your credit utilization is more than credit limit, it means you are outliving your resources.

Multiple loans, unsecured loans, higher credit cards: All these indicate that you are heavily dependent on credit, thus affecting your credit score.

Credit Scores do not improve overnight and you have to work towards building your financial credibility by following a disciplined approach. Here are few ways to improve CIBIL score

Clear your payments on time: Making timely payments would not only help bring about financial discipline but also have a positive impact on your score.

Reduce your Debt Burden: Having excess debt in your portfolio indicates you are living out on credit, which is not a healthy spending habit. Hence, you must limit your debt burden so that it does not pull down your score.

Do not exhaust your credit limit every month: If you do not want your credit card to impact your CIBIL score negatively, then you should not exhaust your limit 100%.

A lending institute will always look at your credit score before processing your loan and hence it is extremely important to keep a healthy credit score.

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