Young People Can Avoid Mistakes By Knowing How CIBIL Works
How healthy are your finances? This is what the CIBIL (Credit Information Bureau India Limited) score is designed to determine. As a young adult, you need this more than most because it is in your youth when you start saving up for the future to build your dreams. There are facts you need to know about how this score is calculated and how things can go bad in it.
- If your CIBIL score is 750 and over, you can avail credit with relative ease.
- Is there a pattern to the way you pay off your loan EMIs and that of your credit card? This carries the most weight, up to 35%, as CIBIL score influences go.
- At 30% stands, the credit utilization ratio, namely the rendition of outstanding balance on any current cards you own, displayed as a percentage of all your cards’ gross credit limits.
- At 15% is the length of credit, namely, how long you have been servicing your debts.
- At 10% come hard inquiries, namely those put on your credit report each time you applied for a new credit card or loan. It actually cuts off points on your CIBIL score.
- The final 10% is fulfilled by mix of credit, namely, what unsecured and/or secured credit is available to your name. A healthy mix of this will reflect positively on your CIBIL score.
We have five invaluable points for you to bear in mind when working with CIBIL scores.
1. Do Not Close Old Credit Cards
We include those cards you had when you were still with your parents, or perhaps they gave you a card or two. When you are able to afford your own card, do not hasten to close these. Those old cards still have your name on them, enough for CIBIL to keep a record of repayment histories made with that card; your folks may have been making the payments then. By declaring the balances in such cards, you can gain points to polish your credit history.
2. The Wrong Credit Mix
Perhaps you feel that getting credit itself is irrelevant. By depriving potential lenders of the chance to analyze your credit history, you make them treat you with caution when it comes to loaning you money. A healthy credit score is a combination of personal loans, auto loans, home loans, and so on. This good credit mix includes two or even three credit card histories. With a responsible use of credit, you improve your CIBIL score. By being aware of your spending habits and keeping punctual when it is time to make repayments, you add to your credibility. As you can see, credit is important and the right credit mix even more so.
3. Unpunctual Payments
No matter how many credit cards you have to your name, if you have even the smallest smudge of unpunctuality in your repayments, it will reflect poorly on your CIBIL score. You must make payments within billing cycles. With proper regulation of your expenses, you will make timely credit card payments including loans. One missed payment has been known to lower CIBIL scores significantly.
4. Greedy For Credit
Do not take up credit unless you are desperately in need of it. We are referring to your approaching moneylenders and credit card dispensers. Applying for too many cards/loans will be recorded in your CIBIL history and make you appear credit-hungry. Inquiries will then be made into your CIBIL report, which in turn devalues your credit score.
5. Credit Utilization Over 30%
Do not exceed that value. Just because you have high credit limit does not mean you need to reach or exceed it. It is a debt trap, if ever there is one, and impacts your credit utilization score by cutting points instead of augmenting to the present score. As long as your utilization stays below 30% of the total, you will find your score growing healthy over time.
If you learn these rules of credit usage and control now while you’re young, you’ll not only develop great money habits, but also prepare your CIBIL score for when you need it down the road.
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