CIBIL Score and Factors Affecting It
When applying for a bank loan, banks assess the applicant’s CIBIL score. A low CIBIL score makes banks hesitant to lend, and if they do, they often charge higher interest rates. Therefore, financial advisors always recommend maintaining a good CIBIL score.
What determines your CIBIL score?
While many believe that only repayment history affects the CIBIL score, there are several other factors at play. To build a strong credit history, it’s crucial to make timely payments on loans and credit card bills.
Credit utilization ratio also matters
Your CIBIL score is also influenced by your credit utilization ratio. This is the percentage of your credit card limit that you use. For instance, if your credit limit is ₹1 lakh and you spend ₹50,000, your utilization ratio is 50%. Ideally, your utilization ratio should be below 30%. If it consistently exceeds this limit, banks may assume you have insufficient income to meet your expenses, which can negatively impact your CIBIL score.
Read this also : What will happen if your Cibil score becomes ‘0’? If you are going to take a loan
Secured and unsecured loans also play a role
Your CIBIL score is influenced by both your secured and unsecured loans. Maintaining a balance between the two is essential. An excessive amount of unsecured loans can negatively affect your score.
Loan settlement can damage your CIBIL score
If you’re unable to repay a loan, you might opt for a loan settlement. However, this can negatively impact your CIBIL score. Your credit history will reflect a settlement, indicating that you were unable to fully repay the loan.
Hard inquiries
Whenever you apply for a loan, the lending institution pulls your credit report from a credit bureau, which is known as a hard inquiry. Frequent loan applications within a short period can increase the number of hard inquiries, potentially affecting your CIBIL score.