Your credit score is an important indicator of your financial health since it frequently determines your capacity to borrow money as well as the circumstances under which lending organisations, such as banks, would extend your credit. Consider the situation of Priya, an IT worker in Hyderabad who wants to purchase her first flat. To obtain a mortgage, she contacts her bank, which first verifies her CIBIL score. A high score (over 750) reassures the bank that Priya is a reliable borrower, perhaps resulting in reduced interest rates and better loan terms. In contrast, a poor credit score may result in higher interest rates or even loan refusal. This highlights the importance of having a decent credit score.
Key factors impacting your credit score
1. Payment history
Out of all the factors that determine your CIBIL score, payment history is the most important one. On-time payments always have a positive impact on the score, whereas late payments, or missed payments, negatively affect the score. For example, if you miss a payment on an SBI credit product, your SBI CIBIL score will be negatively affected, which can lead to more stringent credit terms or rejection of future credit applications. It is important to be consistent in paying bills to protect one’s credit status and avoid adverse effects on credit score.
2. Credit utilisation ratio
The credit utilisation ratio is the percentage of your available credit that you are currently using, and it is a very important factor in credit scoring. High utilisation especially when the credit limit on the cards is being used to the fullest every month can be an indication that you are over-reliant on credit, hence lowering your score. This is usually advised by financial specialists as it helps you keep your credit utilisation ratio below 30% of your total credit limit.
3. Length of credit history
The length of credit history plays a big role in determining your score; longer credit histories are considered to be better as they offer more information regarding your credit handling skills. Having a long credit history with institutions such as SBI will help in obtaining a high CIBIL score as it shows that the borrower has been using the credit responsibly over a long period.
4. Types of credit used
Having more than one form of credit, such as home loans, auto loans, and credit cards, will help boost your score. It proves to the lenders that you can handle different types of credit and are financially wise and creditworthy.
5. New credit inquiries
Every time you apply for new credit, it triggers a hard inquiry that can cause your score to dip slightly. Multiple requests within a short period may signal lenders and thus make them deem you as a higher credit risk. It is important to apply for new credit sparingly and only when required, in order not to negatively impact the score.
6. Total balances and debt
The amount of credit you have may also work against you and bring your score down. The next crucial way to keep your balances low is to manage your debt in the right manner.
7. Public records
The bankruptcies, tax liens, and civil judgments that appear on your credit report can greatly reduce your score. These entries, indicating severe credit insolvency, can negatively impact your creditworthiness for a long time.
8. Credit mix
Having revolving accounts (credit cards) and instalment loans (personal loans, car loans) means that you understand how to manage different types of credit. It is important to note that credit diversification can be beneficial for a credit score as it indicates that you are actively using credit in various ways.
9. Recent credit behaviour
Some behaviours that may negatively impact your score include applying for more credit, making more purchases on your credit cards, or taking on more debt.
10. Frequency of credit use
The proper usage of credit accounts together with timely payments and low credit utilisation ratios shows proper credit management which in turn affects your score positively.
11. Historical data
Paid-off old debts are beneficial to credit scores since they portray a good and efficient credit history in the credit report. This historical data is important as it enables lenders to forecast your creditworthiness in the future with more precision.
12. Errors in your credit report
Inaccuracies in your credit report, such as incorrect late payment records or accounts wrongly listed as open, can unfairly lower your score. Regular monitoring and initiating a CIBIL Dispute to correct these errors are essential practices for maintaining an accurate score.
13. Joint accounts
The management of jointly owned accounts has an impact on your score as well. If your spouse has bad financial habits, it might harm your overall creditworthiness.
14. Settlements
Settling debts for less than what was initially owed can have a negative influence on your credit score since it signals to lenders that you are unable to properly meet your financial responsibilities.
15. Association with defaulters
Being a guarantor for a defaulted loan hurts your credit record, potentially decreasing your score owing to the higher risk.
Why does aiming for a credit score of 750+ matter?
Aiming for a credit score of 750 or higher is more than just becoming eligible for loans. It’s about negotiating beneficial arrangements that can result in large savings over time, such as reduced interest rates and better loan terms. Furthermore, a high score might give you peace of mind when you require immediate cash solutions, such as during an emergency. Regularly monitoring your score, correcting discrepancies through mechanisms like a CIBIL dispute, and understanding what impacts your score, such as your SBI CIBIL Score, can empower you to maintain or improve your credit health. In essence, a good credit score opens doors—ensuring you have financial flexibility when it matters most.
A great credit score also increases your negotiation power, allowing you to negotiate lower interest rates and more favourable terms. It demonstrates your financial accountability to potential employers, making it simpler to get work. A good credit score also makes it easier to get approved for bigger credit limits, allowing you more flexibility in handling larger bills and investments. Maintaining this score necessitates a rigorous approach to financial management, emphasising the necessity of staying aware and proactive about your credit activity.