How does your financial health impact your CIBIL score?
Upstox
3 min read • Updated: February 24, 2024, 4:06 PM
Summary
An individual’s CIBIL score is essentially his/her creditworthiness. It's a representation of their financial standing from the perspective of availing banking services. The Credit Information Bureau India Limited (CIBIL) generates this score ranging from 300 to 900. The CIBIL score is a summation of one's credit history based on factors like credit card usage, loan repayment history, and credit enquiries. Here, a higher score would indicate responsible credit repayment and management and further the likelihood of securing financial services like loans and credit cards. Contrarily, a low score indicates poor credit management and can result in high-interest rates, loan rejections and restricted access to financial services. Individuals can access their CIBIL rating here.
Score calculation
A number of factors contribute to one's CIBIL score, and each factor carries a specific weightage.
Payment history
This is probably the most important factor and carries a weight of 30%. The percentile emphasises the repayment of credit card dues and loans. Delays in repayment and nonfeasance negatively impact the score.
Credit-utilisation ratio
This element makes up 25% of one’s CIBIL score and represents the amount of credit availed. A low credit utilisation ratio indicates responsible credit management.
Credit mix
The form of credit you use also contributes a weightage of 25% to the CIBIL score. An assortment of secure and unsecured loans, like home loans and credit cards, can positively impact your credit score.
Length of credit history
This element represents the duration an individual has been active in the credit system and makes up 20% of the score. Your credit score becomes more credible if you have a longer credit history and consistently use credit responsibly.
How does poor financial health affect your CIBIL score?
Maintaining a good CIBIL score is crucial for individuals who wish to avail themselves of financial services or even make purchases on credit. The biggest factor harming your credit score is not making your loan or credit card payments on time. Each late payment results in a deduction, which dramatically lowers your score.
Additionally, having too much debt on several credit cards and loans might have a negative effect on your credit utilisation ratio and reduce your score. Significant debt loads can cast doubt on your capacity for responsible money management.
It doesn't stop there. Requesting a lot of credit cards or loans in a short amount of time might result in several serious inquiries on your credit report, which can lower your score. This suggests that the borrower may be credit-hungry, which worries lenders.
If your credit score is poor, lenders may deny your loan applications. Even if the loan request is accepted, you may have to pay a higher rate of interest over time, which would put further strain on your finances. Furthermore, people with low credit ratings might find it difficult to obtain credit cards or may be issued cards with limited credit limits, which will reduce their spending power.
Did you know that when performing background checks, some companies take credit scores into account; a low score might hurt your chances of being hired.
Conclusion
Maintaining a high CIBIL score necessitates diligent money management. Making prompt payments on all your credit obligations should be your priority. To prevent late payments, set up payment schedules and notifications. Keep your credit utilisation percentage low and pay off your credit cards. Also, don't exceed your credit limits; instead, pay off high-interest obligations first.