A Credit Information Report (CIR) offers an individual a numeric summary of their credit history. It plays a major role should an individual want to apply for a loan, or a credit card, as all banks and financial institutions run a CIR as part of their loan approval process.
A credit score constitutes a part of the Credit Information Report. Basis the financial information provided by lenders to Credit Information Companies, a score is determined. This score, based on a scale of between 300 and 900, is what is taken into account by a lender prior to offering a loan.
With Credit Information Bureau (India) Limited (CIBIL) a score of 750+ points is considered to be good. For a first time borrower with no previous track record, a score of -1 is displayed.
Different Credit Information Companies however, may have different scoring parameters. Most companies use the definition of ‘bad loan’ as a customer going more than 90 days past in 12 months.
Let us take a look at the factors that can negatively impact your CIBIL score.
Multiple loans and credit cards
Having too many loans and cards can prove detrimental, as it can indicate a high level of borrowing. This would mean that a potential lender may choose not to sanction any further loans as your repayment capacity may already have been maxed, your income. Further, it may get difficult to manage payments between multiple cards, and can lead to your having to stretch your income in order to keep up.
Not using your credit card
Having a credit card with no usage, makes the customer’s file inactive as there is no transactional data. This in turn can negatively impact the score.
No loans at all!
On the other hand, having no loans or no credit cards makes it difficult for a lender to assess your repayment capacity. Hence it may be a good idea to maintain a loan or card well within your means, to set a benchmark for future borrowing.
Delayed and skipped payments
This is typically the case with credit cards, wherein a customer does not make a timely payment owing to the fact that it slipped out of the mind. What would help in this case is to set up payment reminders and ensure that the outstanding dues is paid up as per the payment dues date. Even a single skipped payment can have an adverse impact on your score.
Increased credit limit
While this may have a feel-good factor, it may not have such a positive outcome after all! Constantly increasing your credit limit may again indicate a high level of debt. Instead, keep your card dues to approximately 30% of the assigned limit.
Not using your credit card
Having a credit card with no usage, makes the customer’s file inactive as there is no transactional data. This in turn can negatively impact the credit score.
Too many unsecured loans
Personal loans or an excessive number of credit cards can mean higher payments owing to higher rates of interest, these being unsecured loan products. This can result in a lower score.
Now that we know what can affect your score.
Timely and full payments on loan and credit card outstanding go a long way in maintaining your CIBIL rating.
Having a healthy product mix
Balance of secured and unsecured loans shows that an individual is capable of handling finances well. This can help you to improve your CIBIL score.
Track your credit report regularly
An erroneous entry in your CIR can prove detrimental, as the score can go down. It would be prudent to check your report at regular intervals and ensure that the score is not adversely affected.