Does your CIBIL Score look like a puzzle to you? Truth be told, it is, to some extent. Each component in the CIBIL score calculation contributes to the overall image of your creditworthiness. For a credit seeker, it is imperative to know about transunion CIBIL score calculation. After all, this three-digit score, which lenders use to measure how responsible you are as a borrower, influences your financial well-being.
TransUnion CIBIL, India’s oldest credit bureau, calculates your CIBIL Score, which ranges from 300 to 900. It considers a variety of criteria that represent your credit behaviour. The higher your credit score, the more trustworthy you look to be as a borrower. This means you’re more likely to get credit and benefit from better conditions and reduced interest rates. For the best financial chances, keep your CIBIL Score at 750 or higher. So, let’s take a closer look at this number and understand which factors influence it.
- Payment record: Your payment history serves as a record of your financial dependability, accounting for 35% of your transunion CIBIL score. As a result, timely repayment of your credit obligations is critical to establishing confidence with lenders. Consider it like caring for a garden: regular attention will lead it to bloom, whereas neglect in the form of late payments and defaults will cause it to wither. So, to maintain a good CIBIL Score, honour your financial commitments by paying your bills on time.
- Ratio of credit utilization: Your credit utilization ratio accounts for 30% of your transunion CIBIL score and shows the percentage of available credit that you use. Responsible credit management entails keeping a credit utilization percentage of 30% or below. It’s like adding exactly the proper amount of seasoning for a dish, rather than pouring on anything you have and risking leaving a nasty aftertaste in customers’ mouths.
- Length of credit history: Consider your credit history to be a tree. A long credit history, like a tree, grows stronger and more dependable over time, laying a foundation of confidence with lenders. It’s similar to having strong roots that show your financial stability and durability. While creating new credit accounts might have a negative impact on your credit score, you can develop a positive credit history by appropriately managing previous accounts and avoiding excessive new credit.
- Credit Mix: A diverse credit profile is like a well-stocked toolbox with a range of tools for various uses. Having a variety of credit types in your financial toolkit is equivalent to being ready for any work that comes your way. Lenders are pleased with such diversity since it demonstrates your adaptability and ability to manage a variety of financial commitments. Consider adding a secured home/auto loan and a collateral-free personal loan to your financial portfolio if you already have a credit card.
- Credit inquiries: Checking your personal credit report results in a soft inquiry. This has no bearing on your credit score. When you apply for credit, lenders will look at your credit record. This is called hard inquiry as it will lower your score. Too many such inquiries in a short period of time can raise questions about your creditworthiness. Furthermore, they can stay on your report for up to two years, affecting your future approval chances. So, keep track of how many hard credit inquiries you initiate and try to keep them to a minimum.
Keep in mind that your CIBIL Score is your key to improved financial prospects and a brighter future. So, be proactive and cautious in managing your credit to lay a solid foundation for the financial future of your dreams.
Let’s have a look at some of the major problems that can have a negative impact on your CIBIL score:
Irresponsible Payment Behaviour: Your payment history has the greatest impact on your credit score. Every month, it is critical to pay your credit card payments and loan EMIs on schedule. According to a CIBIL investigation (as published by the Financial Express), a 30-day delinquent might drop your score by 100 points. If you have many credit cards and loans, it is a good idea to set up reminders and notifications to avoid missing or delaying payments. Any missed or late payments reflect adversely on your credit score and indicate that you are inconsistent in repaying your credit.
High Credit Utilisation Ratio: One of the most important guidelines to remember is to keep an eye on your credit utilization ratio. It is the amount of credit you have utilized in relation to the credit limit you have available. Experts recommend that you do not use more than 30% of your credit limit. If your credit card limit is Rs.1 lakh, you should spend approximately Rs.30,000. If you have spent more than half of your credit limit, it may have a negative impact on your credit score. Lenders will raise an eyebrow if you have a large credit exposure because it signals you are more likely to default.
Outstanding Debt: You should constantly make an effort to pay off any outstanding obligations. Unpaid debts on your credit report have a negative impact on your credit score. Even if the amount is low, it is best to pay off any outstanding debts.
Paying Only the Minimum Amount Due: A minimum amount due is a little part of the outstanding principle each month. If you consistently pay only the minimum amount due, you may find yourself in debt. Rolling over debt and merely paying the minimal amount results in interest compounding on your outstanding balance. As a result, it is best to pay your credit card bills in full. It also reflects bad repayment habits.
Making Multiple Credit Applications: Lenders will want to assess your creditworthiness when you apply for a loan or a credit card, and they will do so by checking your credit report. This is known as a hard inquiry. If you submit several applications, numerous credit queries will take place at the same time. These difficult questions are reported and have a negative impact on your score. It makes you appear credit-hungry.
CIBIL Report Errors: Your CIBIL report contains a full record of your current and former credit accounts. Any inaccuracies in your report can lower your overall score. So, if there are any errors in your report, you must correct them right away. Only your lenders can correct these mistakes. CIBIL does not alter reports unless lenders submit the necessary modifications. You can check free CIBIL score as it might also assist you in determining if you are a victim of identity theft or not.