How to improve your CIBIL score for better credit card and loan approvals

Your credit or CIBIL score is crucial to assess your financial health and creditworthiness. As mandated by the RBI, all banks and financial institutions check your CIBIL score before approving any loan or credit card applications. While different lending institutions have varying criteria to assess and analyse your creditworthiness, your CIBIL score plays a major role in determining your eligibility.

Apart from CIBIL, three other organisations—CRIF High Mark, Experian, and Equifax—also offer credit scores based on several parameters. These include your repayment history, number of loan or credit card applications over the last three years, credit limit on different credit cards, and your credit age. Thus, your credit report from any of these institutions acts as a snapshot of your financial history and tells institutions how reliable you are as a borrower.

If you are relatively new to the financial world or don’t have a good credit score, one important question you should ask is how you can improve your CIBIL score. In this article, we elaborate on the different ways you can enhance your credit score to ensure you can avail of loans and other financial products.

Review your credit report

How can you improve your CIBIL score? The first thing to do is review and analyse your credit report. Knowing your updated credit score before applying for a loan or a new credit card will help you assess your chances of securing it. As per the RBI’s mandate, all four credit information companies must offer a free credit report once every financial year. Additionally, several NBFCs allow you to check your credit report for free by visiting their websites.

Pay outstanding bills or dues

When researching how to improve your CIBIL score, you will often come across the suggestion that you pay your outstanding bills. This is because unpaid bills or EMIs will reduce your credit score by a significant margin. You can also talk to your lender to see if you can close your loan account before the original date. Furthermore, use just one or two credit cards at a time, which will help you pay your bills before the due date.

You must also pay other bills (such as utilities or phone bills) on time. Failing to do so can result in your provider referring your debt to a debt collector or reporting to a credit reporting agency. This may result in them recording your default on your credit report.

Also read: What is credit risk

Find and dispute errors

By regularly reviewing your credit report, you can spot errors and dispute them immediately, which can otherwise pull down your CIBIL score. Monitor the credit reports from all four credit information bureaus and flag any inaccuracies, which can happen from time to time. It is mandatory for credit information companies to address the issue within 30 days, resulting in an improved credit score.

Show ‘good debts’

Most of us believe that not having any debt will improve our credit score. However, that isn’t always the case. This is where having a good credit mix comes into play. One way to improve your CIBIL score is to have a healthy mix of secured and unsecured loans.

If you don’t have a loan history, the lender cannot assess your capability to repay future loans. Thus, you can strike a good balance between unsecured loans (such as credit cards) and short-term secured loans that are easy to repay, which will, in turn, improve your credit score. Good debts are those that you have handled well without any repayment delays or defaults.

Make timely credit card payments

While a credit card allows you to buy an item now and pay for it later, it is important to use plastic cards judiciously. While understanding how you can improve your CIBIL score, you must also look at your spending behaviour. Furthermore, while making credit card payments, you can either pay the minimum amount due or the total outstanding amount. It is vital that you pay the entire outstanding amount, and if you have a cash crunch, at least pay the minimum amount due before the due date.

Also read: What is credit risk fund

Maintain a low credit utilisation ratio

Your credit card's utilisation ratio is the amount of credit you use for purchases against your total credit limit. You must avoid using your credit card for each and every purchase. Try to keep the credit utilisation ratio below 30-40% to improve your credit score.

Check if you can increase your credit limit

One way of keeping the credit utilisation ratio low is by increasing the credit limit on your credit cards. Most credit card issuers offer enhanced credit limits from time to time, provided you have paid your previous bills on time. You can also get in touch with the issuer and request an increase in your credit limit.

However, this does not mean you utilise your credit card for frivolous purchases. Furthermore, ensure you do not spend beyond your repayment capability.

Also read: What is Interest Rate Risk

Be wary of joint applications

You must be careful while acting as a joint applicant. In this situation, if someone else takes the loan amount with you as a joint applicant and fails to repay the amount on time, the default will be recorded on your credit report as well.

So, how can you improve your CIBIL score? Only vouch for people you know well and are sure can repay the amount on time.

• Increasing your CIBIL score improves your chances of availing of loans at competitive interest rates.
• There are several ways to improve your credit score, such as maintaining a low credit utilisation ratio, paying off your debt, and disputing errors on your credit report.
• While the credit score requirement varies between lending institutions, maintaining a score of 750 or above is considered ideal.

Improving your CIBIL score takes consistency, but it's achievable with the right approach. Simple actions like paying EMIs on time and managing your credit utilization ratio can significantly boost your score.