The following 6 factors affect your CIBIL score.
Repayment History ( Weightage 35%)
Repayment history has a 35% weight in you final CIBIL Score. Therefore it is extremely important to make timely payments of your EMI and credit cards.
Every late payment and default is reported by the banks to CIBIL that records and factors that in your score. Hence every time you are late on your car loan, credit card, home loan or personal loan payment it will affect your credit score negatively. Moreover once a late payment gets recorded it takes a year or more of regular payments for it to not have an impact on your CIBIL score.
Specifically for credit cards, it is always a good idea to have your credit cards on auto-pay from your bank account so that you do not forget to make a payment. Alternatively, you can use MyMoneyKarma Financial Tools that will provide you with automated reminders on your upcoming bills. Please also ensure that your bank account has enough funds to clear your EMI.
Credit Utilisation: (Weightage 30%)
Second most important factor in your credit score is credit utilization with a weight of 30%. Credit utilization simply means what percentage of your available credit are you using. For example, if you have a 100,000 limit on your credit card and you use 80,000 every month your credit utilization is 80% and if you use 30,000 every month it is 30%.
Higher credit utilization percentage is interpreted as you trying to manage your credit and affects your credit score negatively. To have a good score utilize a max of 40 to 50% of your credit limit and make full payments before due dates.
Loan Tenure: (Weightage 15%)
Loan Tenure is the next factor with 15% weight in your credit score. The longer you have repaid your loans on time the better it is for your credit score. The same is applicable to your credit cards too.
Therefore if you have a credit card and secured loans being repaid on time it will help you with your credit score. Any loan defaults or settlements with lenders due to inability to pay to reflect negatively and affect your score adversely. It is important to only take on debt that you can replay.
Search Frequency/Enquiries: (Weightage 10%)
Enquiries have a 10% weight on your credit score. When you apply for any credit to a bank, irrespective of the outcome of the application the bank reports that to the CIBIL as an enquiry for credit. If you apply to many banks all those will be reported to the CIBIL and you will have many enquires on your credit score. If there are too many enquiries in a short period of time that affects your score negatively.
This can be avoided by simple steps such as enquiring with banks only when you need credit and applying only to a shortlisted set of banks for your credit requirement instead of all the banks. You can shortlist the best banks and credit products for you easily on mymoneykarma. It is also advisable to have a gap between your enquiries.
Loan Mix: (Weightage 10%)
Loan mix has a weight of 10% on your score. Having both secured loans: loans backed by assets such as home loan, car loan and unsecured loans: loans that are not secured by assets such as personal loans and credit cards, will help affect your credit score positively. A lot of unsecured loans only might affect your score negatively so it is advisable to pay them down.
To conclude financial prudence and using tools like mymoneykarma will help you manage your finances judiciously and keep a healthy CIBIL score to help access credit when you need it.