Scoring it right with CIBIL

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Life can just knock us down completely sometimes. Sickness, business or job loss, bankruptcy or the prolonged illness of someone in the family can rig a hole in our finances. It is the time that has you avail more credit and default on payments.

This hits your credit rating bringing down your credit score making it difficult for you to avail further credit.

 

Re-building your credit score is sometimes the toughest of things. It is difficult but not impossible. Most importantly, it takes time, perseverance and financial discipline.

Here’s a classic case of Karthik losing his credit score with CIBIL. Owning multiple credit cards is a status symbol and a growing trend among the millennial population. It is also one of the commonest causes for a low CIBIL score.

  1. The pain of managing multiple accounts: Each credit can revolve on a different payment and credit cycle. Karthik, just like everyone else, did not opt or ask for one payment cycle on all of his cards. This made it difficult for him to adhere to the dates. Revolving credit as you know costs a lot. As high as 42% annually. Although Karthik did not miss payments regularly, it happened often. The difference between making a payment within the due date and beyond the due date is 30%. This dented his credit score.
  2. Overusing: Using credit on multiple accounts or cards will mean that you carry a lot of debt with you at any given point of time. Karthik also has a car loan with a running EMI. He uses his credit card as a ticket to fill the gap of the car loan EMI. Banks would deny credit to individuals who are already in debt. They understand their profile as ‘bad’ in handling or using credit responsibly and profile them with low credit worthiness.
  3. Closing credit cards: Based on the advice of a few good friends, Karthik decided to close a few of his credit cards. This proved counter- productive. How? Closing credit cards will actually mean a decrease in your overall credit limit which will translate as the individual using up a higher credit limit. This will increase the credit utilization ratio adversely affecting the CIBIL score.
  4. Inactive cards: Karthik also had a lot of unused credit cards. The best way to close them would be to make a small expense on the card and pay back on time and in full in order to enhance the score. However, Karthik did just the opposite denting his CIBIL score further.
  5. Credit Imbalance: Credit scores are also governed by the type of credit availed. Home loans and Personal loans have a significant and positive influence on the credit score when repaid on time while the credit card is rated the least. Karthik had this balance to an extent because of his car loan.

 

With all these factors Karthik ended up with a battered credit score. How can Karthik rebuild his score?

  1. Pay off all his debts on time – The first thing Karthik can do is pay more and pay on time and start using his card lesser. In other words, spend less and save more to increase his CIBIL score
  2. Take up secured credit cards which are offered by quite a few banks against an FD. This can considerably increase a credit. However, Karthik needs to build his FDs J
  3. Paying his loans on time. Making regular EMI payments on his Car loan also builds his credit score.

CIBIL maintains your credit history for 7 years. It displays your repayment history for 36 months. If Karthik has been making his payments on time, while balancing out on his EMIs too. His credit history will look good after 3 years.  Banks look for stability and reliability in a consumer. And the best way to create this is to pay bills on time and use credit responsibly.

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