What are the Factors that Affect your CIBIL score?

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A CIBIL score is made up of four main factors:

Payment History	35%
Owe to lenders	30%
Credit Type and Duration	10% to 15%
Credit Mix	10%

Let’s take a look at some of the major factors that can affect your CIBIL score negatively:

Irresponsible Payment Behaviour: Your payment history has the biggest influence on your score. It is important to pay your credit card bills and loan EMIs on time every month. As per a CIBIL analysis (reported by the Financial Express), a 30-day delinquency can reduce your score by 100 points. If you have multiple credit cards as well as loans, it is advised to set up reminders and alerts, to avoid missing payments or delaying them. Any missed or overdue payments reflect poorly on your score and suggest that you are not consistent with repaying credit.
High Credit Utilisation Ratio: One of the golden rules you should follow is to keep an eye on your credit utilisation ratio. It is the amount of credit used in proportion to the credit limit available to you. According to experts, you should ideally not exceed using 30% of your credit limit. For example, if your credit card limit is Rs.1 lakh, you should spend around Rs.30,000. If you have used over 50% of your credit limit, it can have a negative effect on your score. Having a high credit exposure will send a red flag to lenders as it indicates you are at a higher risk of defaulting.
Outstanding Debt: You should always make sure to clear off your outstanding debts. When you have unpaid dues reflected on your credit report, it takes a toll on your score. It is advised to pay off the outstanding dues even if the amount is small.
Paying only the Minimum Amount Due: The minimum amount due is a small portion of the outstanding principal each month. Consistently paying only this amount can lead to a debt trap, as it causes interest to compound on your remaining balance. Therefore, it’s recommended to pay your credit card bills in full to avoid accumulating debt and to maintain a good repayment record, as relying solely on the minimum payment reflects poor financial behavior.

Making Multiple Credit Applications: When you apply for a loan or credit card, lenders assess your creditworthiness by reviewing your credit report, which results in a hard inquiry. Submitting multiple applications in a short period triggers several hard inquiries, which can negatively impact your credit score and make you appear credit-hungry. If your loan or credit card application was recently rejected, it’s advisable to wait before applying again. Focus on improving your CIBIL score first, then reapply.
Errors in your CIBIL Report: Your CIBIL report has a detailed record of your current as well as past credit accounts. If there are any errors in your report, it can hamper your score. So, if you any discrepancies in your report, you must get them rectified immediately. These errors have to be rectified by your lenders only. CIBIL does not correct reports without lenders reporting the changes to be made. Also, checking your credit report can also help you identify if you are a victim of an identity theft.
Not Having a Credit Mix: It is important to maintain a healthy balance of secured and unsecured loans. Home loans and auto loans are examples of secured loans while a credit card is an example of an unsecured loan. If you have a high number of only one type of credit, it can affect your score. Also, when you have a healthy mix of different types of loans, it suggests that you have experience in handling both different types of loans. This is considered desirable by lenders.
Length of the Credit History: In simple terms, credit history means the total number of years that have passed since you have first opened a credit account. If you have a long credit history, it helps lenders take a sound decision at the time of offering you credit. It is better to focus on building a credit history in the earlier stage of life as, by the time you apply for a home or car loan, you will have a good record of credit transactions.
Closing old Credit Card Accounts: Credit cards are a great tool to build credit history. However, when you close your old accounts, you end up losing a long credit history associated with it. Therefore, if you have used the card for a substantial number of years, it is advised to keep it open as long as possible, if feasible. Consider closing a card that is relatively new.

Benefits of Having a High CIBIL score

Quicker approval for loans and credit cards
Cheaper interest rates on loans
Better deals on credit cards
Credit cards with higher credit limit
Discount on processing fee and other charges for loan applications

It is important to check your CIBIL score from time to time. Make sure your score is above 750 to enjoy better access to credit products. You are entitled to receive one detailed credit report for free from CIBIL per calendar year.

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Hard Inquiry

A hard inquiry occurs when you apply for a loan or credit card, allowing the lender to check your credit report to assess your creditworthiness. This process slightly lowers your credit score, regardless of whether you’re approved for credit. Hard inquiries are conducted by financial institutions through credit bureaus like Equifax, Experian, TransUnion CIBIL, or CRIF Highmark. In contrast, soft inquiries, such as when you check your own credit report or undergo prequalification, do not affect your credit score.

When a financial institution or bank accesses your credit report from one of the four main credit bureaus (Equifax, Experian, TransUnion CIBIL, or CRIF Highmark), it is termed a hard inquiry. Each instance of a hard inquiry results in a slight decrease in your credit score, irrespective of whether you receive credit approval. In contrast, if you personally check your credit report or undergo a prequalification process, it is considered a soft inquiry, having no adverse impact on your credit score.

What Prompts a Hard Inquiry on Your Credit Report?

A hard inquiry is recorded on your credit report if you have:

Applied for a new credit card within the last two years.
Applied for a new loan, including personal loans, car loans, home loans, education loans, mortgage loans, etc.
Requested a balance transfer card or loan.
Applied for a business credit card.
Applied for a credit limit increase.

How Hard Inquiry Affects Credit Score?

Credit bureaus only consider inquiries from the past 12 months when computing your credit score, even though hard inquiries remain on your credit report for more than two years. The effect of a hard inquiry on your credit score is also influenced by your credit history. If you possess a robust credit history and score before seeking new credit, a fresh, hard inquiry may have minimal or no adverse effects on your credit score.

It is observed that hard inquiries can significantly impact the credit scores of individuals with a short credit history or limited credit accounts. Therefore, if you are in the early stages of building your credit, a hard inquiry could potentially cause more harm to your credit score compared to someone with an extensive credit history. However, this doesn’t mean avoiding credit applications altogether. It’s acceptable to have occasional inquiries as it demonstrates an effort to establish credit. Just be cautious and only apply for a few credits in a short period.

Lender’s Perspective on Encountering a Hard Inquiry

While hard inquiries are deemed less impactful in credit score calculations, they hold substantial weight in evaluating your likelihood of timely debt repayment. This is why lenders consistently review your credit report to gauge your creditworthiness. An excess of hard inquiries indicates potential financial strain, suggesting a heightened risk for future borrowing. Nevertheless, lenders take into account additional factors, including your income and payment history, when deciding to approve or reject your credit application.

How to Reduce Number of Hard Inquiries?

While hard inquiries aren’t always detrimental, as they might cause a temporary credit score dip, it’s advisable to understand how to minimise their occurrence. Here are a few considerations to keep in mind:

Avoid applying for multiple credit cards in a short timeframe. Consider spacing out applications, aiming for a new credit card every six months.
Apply only for credit cards aligned with your financial needs. Avoid accumulating hard inquiries for cards you do not genuinely require.
Check your credit score and your credit report before you apply for new credit. Ensure you meet eligibility criteria by reviewing your credit score and report in advance.
Explore prequalification options. Evaluate your creditworthiness without affecting your credit score by applying for prequalification before seeking new credit.

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FAQs on Major Factors That Affect Your CIBIL Score

What can negatively impact your credit score? The practice of delayed payments of debts impacts your credit score negatively and significantly drops your credit score.
Does paying interest affect credit score? Interest paid on loan or on credit card transactions are not considered while calculating your credit score, and hence, it has no impact on your credit rating.
Does bank balance affect credit score? The bank account details do not reflect on your credit report and hence, it has no direct impact on the credit score. But the lenders do keep track of your spendings, assets and other information related to bank account balance to figure out whether you are capable fo taking debts.
Do debit accounts affect credit score? No, debit card transactions such as withdrawal from debit accounts do not affect your credit score. This is because debit card transactions are not a form of credit, and hence, it does not get reported to credit bureaus and does not impact the credit score.
What helps raise your credit score? Some of the significant factors that help raise your credit score are clearing payments on time; avoid creating new accounts frequently; paying the revolving account balances; tracking and catching-up the past due accounts; and create your credit file.
Why is my credit score going down when I pay on time? Paying off debts affects certain parameters such as credit utilisation ratio, credit mix, or the length of your credit history. Your credit score may drop after clearing off your debts on time if these parameters are affected.
Do overdrafts affect credit score? Yes, overdraft affects the credit score negatively if you fail to deal with it properly. Going beyond the overdraft limit will prove to the lenders that you are financially struggling, and it will bring down your credit score.
Does standing order affect credit score? Standing order and insufficient funds in your account can impact your credit score negatively. This will not only affect your credit rating but will also make future borrowings way more difficult
.How can I improve my credit score naturally? The best way to improve your credit score naturally is to improve your payment history by clearing all your payments on time. Try to at least clear the minimum amount in case you are unable to pay the entire amount.
Is it possible for CIBIL to have incorrect information about a person? Yes, there have been cases reported where people have had their loan applications rejected despite having performed well with debt in the past. This is because banks and lenders sometimes erroneously give the wrong information to credit bureaus, who use the wrong information to generate credit scores. It is possible to have this information corrected by contacting the bank and the credit information bureau.
Is it true that employers are looking at CIBIL scores these days? Yes, employers are considering the CIBIL score of a candidate as a measure of stability and reliability. Having a good CIBIL score these days not only helps you get a loan, but also a job.
Is it true that my employer’s credit history will affect my eligibility for credit? If the company you work for has defaulted on loans or failed to repay debt in the past, it may have been blacklisted by lenders. If you apply for a loan and disclose that you work for a blacklisted company, lenders may reject your application, assuming your job is unstable. While this isn’t your fault, lenders prefer applicants who pose minimal risk of defaulting on the loan. This is known as rejection by association.