What is CIBIL Score and how to improve it?

What is a CIBIL Score and what factors affect my CIBIL Score?

CIBIL Score is a 3 digit numeric summary of your credit history, derived by using details found in the ‘Accounts’ and ‘Enquiries’ sections on your CIBIL Report and ranges from 300 to 900. The closer your score is to 900, the higher are the chances of your loan application getting approved.

How can I improve my CIBIL Score?

You can improve your CIBIL Score by maintaining a good credit history, which is essential for loan approvals by lenders. Follow these 6 steps which will help you better your score:

  1. Always pay your dues on time:
  2. Keep your balances low:
  3. Maintain a healthy credit mix:
  4. Apply for new credit in moderation:
  5. Monitor your co-signed, guaranteed and joint accounts monthly:
  6. Review you credit history frequently throughout the year

Myths and Facts

  1. MYTH- CIBIL maintains list of defaulters only and having your name in CIBIL is bad.
  2. MYTH- If you check your CIBIL Score and Report, your credit score will go down.
  3. MYTH- It is better to use cash than credit cards or loans.
  4. MYTH- CIBIL is an organization meant ONLY to help banks and financial institutions.
  5. MYTH- CIBIL has the authority to make corrections in my credit report directly.
  6. MYTH- A low CIBIL Score means I will never get a loan or credit card.
  7. MYTH- My assets, income, investments; all have an impact on my CIBIL Score.
  8. MYTH- A bounced cheque will lead to a lower credit score of the cheque issuer.

How to correct mistakes on your Credit Information Report

Dispute Resolution Process: How to correct mistakes on your CIBIL Report

Your CIBIL Score and Report are important factors in the loan application process. Hence, inaccuracies on your credit report can result in reduced chances of a loan approval. It is very important for every credit-active individual to understand the types of inaccuracies that can occur and what it means for their CIBIL Report. CIBIL cannot alter any credit information in your report unless authorized by the Credit Institution (CI).

Types of Inaccuracies

  1. Inaccurate Current Balance or Amount Overdue
    On purchasing your CIBIL Score and Report, you may notice that your ‘Current Balance’ or ‘Amount Overdue’ may not be updated for your most recent payment. This is usually the case if you have purchased your CIBIL Score and Report within 45 days of making a payment. Credit institutions generally submit the data concerning last payment of dues/EMI within 45 days, so the latest payment may not reflect on your credit report until the data is submitted by that lender. However, if the ‘Date Reported’ (the date the data was reported to us) associated with that account was over 2 months ago, you can write to us to update this information.
    An inaccurate ‘Current Balance’ (especially on the high side) implies that you have more debt than you do. ‘Amount Overdue’ indicates that you are unable to service your existing loan obligations. Both are viewed negatively by lenders and may affect the chances of your loan approval.
  2. Incorrect Personal Details
    Credit information is submitted to us by various Banks and Financial Institutions. Each lender submits your credit account along with your personal information such as name, address, date of birth, PAN, etc. We then use the personal information to collate these details into a single CIBIL Report which provides your complete credit profile.
    Ensure that you have provided accurate and updated details to your lender at the time of your loan application. In addition, every time your personal details change or are updated you should inform your bank or financial institution so that they are able to make the necessary changes to their database.
  3. Ownership
    If any personal detail or one or more of the accounts on your CIBIL Report do not belong to you, you should initiate the Dispute Resolution Process as detailed below.

What to look out for to avoid Credit Card Debt Trap?

The easiest way to make your loan search (and application) simpler and faster is to maintain a high CIBIL Score. Learn about the most common debt traps, and how to steer clear of it so that it does not affect your credit health negatively.

What are the signs that indicate that you are or may be getting in to a debt trap?

  • When you are spending beyond your means
  • When you are paying your bills late and constantly missing payment deadlines
  • When you have exhausted existing loan options available
  • When you can’t do without a credit card
  • When you have not made any investments in a while

How can you avoid getting into a debt trap?

Today most of the urban population uses a Credit Card. It is a brilliant way to manage your money provided you pay your credit card bill on time. Since you are buying more credit period, this means your savings continue to earn at least minimal interest rate (if it is lying with the bank) while you continue to spend. But do take a note of the points below:

  • Read the fine print-Before availing any new credit, read the terms and conditions. Taking Credit Card as an example, let’s discuss a few eye-openers:
    • Interest free credit period- You may be under impression that you have 30-35 days of interest free credit, but don’t forget that this period starts from the first day of the billing cycle and not from the date of purchase (unless otherwise specified by your lender). You can best utilize this by making most of your purchases at the start of your billing cycle and thereby effectively using the “interest-free period” to stay out of the debt trap.
    • o Interest Cycle- In most cases, interest rate is charged from the date of purchase and not from the payment due date in the event of any default or payment of minimum amount due. Let’s look at an example:
      • Amit buys a LED TV for Rs 50,000 on 1st January, and a washing machine on 15th January for 12,000. The due date is 15th February. He misses this deadline. So now the interest calculation which can be as much as 36-45% p.a will be levied along with late payment charges.
      • So how is the interest rate calculated? It is generally calculated from the date of purchase and not from the due date or bill date. This changes everything! Amit now would be paying interest for 45 days on the TV and 30 days for the washing machine purchase. So even though you may think that you missed your payment by a day or a week, your interest liability is much more!
    • Cumulative Interest- When you are revolving your money i.e., just paying the minimum due, you continue to accumulate interest charges from the first date of purchase. Whenever a payment is being made it is being offset against the first purchase. Once that is adjusted then it moves to the next purchase. In short, it follows the FIFO method. For example, If your current credit card bill is Rs 10,000 and assuming you are not spending further on the card and paying Rs 500 monthly, then it will take you as much as 3 years to pay off the entire amount. For every 100 you have spent, you will pay back Rs 175!
  • Spend only on what you need :You may have read this before but it does not get simpler than this. Follow a simple exercise for a month- track ALL your expenses. Note it down on your phone or at home. When you do this, you will realize where your money is going. Then curtail on the things that you don’t need.

Also all this effects your CIBIL Score. Not only does your payment history gets affected in case of default but also your current balance increases, indicating higher debt.