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When you go to apply for a business loan or advance, the first thing you must ensure is to have a high CIBIL score value. In general, a 650+ CIBIL score is regarded as a good CIBIL score and will qualify you for loan applications. Lenders (i.e., banks or NBFCs) will have to ensure that there’s little risk associated with lending you funds and hence will check for your creditworthiness. There are several factors affecting your CIBIL score, and you should be careful to ensure that your credit score does not dip. Let’s take a look at some of the key CIBIL score influencers and CIBIL rating determinants.
Also, remember, if you have a low CIBIL score, there are ways to fix it. It may not be possible instantly, but when planned it’s possible to reach a credit score of 650+ in a few months, which is often the minimum credit score required for a business loan.
Factors affecting high CIBIL score value
A positive or negative CIBIL score impact your personal and business credit report. That is, it impacts your ability to build trust in lenders to borrow funds as you come across as a potential defaulter. When determining your CIBIL score therefore, several factors are considered. Some of the creditworthiness shaping factors are:
- Your history of loan repayment and other payment history (e.g., credit cards, MFs, etc.)
- Your exposure to credit facilities (e.g., how much credit have you borrowed in the past, duration and nature of borrowing, credit mix)
- Your basic financials
Let’s understand them in more detail.
1. Missing a loan and credit card repayment
If you are among those individuals who have missed a credit card or loan repayment, then you credit score is negatively impacted. This is probably one of the first components affecting credit rating – your ability or inability to make timely repayments. There are multiple negative impact of not paying EMIs on time, and credit rating is a prominent one. In fact, almost 30% of your credit rating is determined by your ability to repay credit on time.
2. Repaying basic amount only
The sum you repay is another credit score influencing factors that you should keep in mind. Put simply, do you repay your entire credit card due in one go or do you repay the minimum repayment amount only? For example, if your monthly credit card bill is ₹15,000 do you repay the entire bill amount or the minimum amount, e.g., ₹5,000?
This will impact your credit score and you are considered a more reliable borrower if you are able to repay the entire sum or majority before taking another credit. Moreover, when it comes to credit cards, the more unpaid bills, the higher the interest rates.
With loans however, this option is mostly not available, as borrowers have to repay EMIs. Amortised loan EMIs has a monthly repayment schedule and in this case, even if you miss a single repayment, it negatively impacts your CIBIL score rating. So, when considering taking a credit, check your ability to repay, since this is among the top factors affecting your CIBIL score report.
3. Maintaining a healthy credit mix
It’s understandable that if you are running a business, you will require funds for different purposes. You may require a business loan or working capital loan, equipment finance or machinery loan, commercial vehicle loan or any other. Of the different factors that impact credit health, applying for multiple loans or credit cards at the same time, is one that is going to impact your credit score.
The secret therefore is to have a healthy credit mix. That is, instead of availing only business loans, check for different types of business financing options. This will help you position yourself as someone who is able to manage finances efficiently and make you stand out.
For instance, you may apply for a loan against property (secured loan) and an invoice finance at the same time. While in the first case you will have to pledge your asset for a loan, in the latter it’s credit against verified customer invoice payments.
4. Having an unhealthy debt to income ratio
Though your income is not among the determining factors for CIBIL score, your debt to income ratio is a key factor impacting CIBIL score. Put simply, it means how much credit you already owe.
For instance, if your monthly income is ₹50,000 and you have credit card bills and car loan EMIs for ₹20,000, it means that almost 40% of your income is already tied up in credit. And that’s not a promising factor for credit score.
Ideally, your debt to income ratio should not exceed 30%. If it’s beyond that, then it’s time to relook at your expenses and identify areas you can cut spending. Arguably, this is among the major factors affecting your CIBIL score value.
5. Rejection of loan application
Of the elements impacting credit score, this is the next one to be wary of – the impact of loan rejection on your CIBIL score. If you had applied for a business loan in the recent past, there are several reasons why it could have been rejected. In such cases, even if you have an urgent need of funding, you should ideally stop yourself from approaching a different bank or NBFC for a loan immediately. This is because if your loan application has been rejected then it will impact your credit score, and if a new lender is enquiring about your CIBIL report (this is known as a hard enquiry), the CIBIL score will dip further.
As such, if your loan has been rejected, it’s recommended to learn the reasons for loan rejection and take the right steps after loan rejection to ensure you are able to stabilise your CIBIL score.
6. Settling loan accounts
Does settling a loan affect your CIBIL score? Here let’s begin by understanding that ‘settling a loan’ is not the same as ‘closing a loan’, i.e., all dues cleared.
Setting mostly refers to a situation where you come to a settlement with the lender and get out of debt. A part of the loan amount is paid by the borrower and the lender settles the remaining as a one-time settlement.
As can be guessed, settling a loan is seen as negative behaviour by credit agencies and is among the top factors shaping your creditworthiness. The settled loan is stored in your credit report for almost 7 years and even reduces your credit score by 75 to 100 points.
In fact, with the mention of a settled loan in your credit report, there are higher chances of outright rejection of future loans, as no lender wants to risk giving a loan to a defaulter.
7. Maximising Credit Utilisation Ratio
If you are a credit card user, this is easy to comprehend. Your credit card comes with a maximum credit utilisation amount, e.g., ₹1 lakh. That is, you can buy things on credit for up to ₹1 lakh or can buy for ₹70,000 or ₹25,000 or any amount.
How you utilise your credit is what affects your CIBIL score. Ideally, if you utilise up to 30% of your total credit limit, (i.e., ₹30,000) your credit record will be satisfactory. This is because when you utilise less credit, it’s demonstrative of good financial health and less reliance on credit.
Lenders naturally feel more confident to sanction loans to borrowers who have financial stability and are not known for living on credit. In fact, this is a safe way to increase CIBIL score, i.e., stop maximising your credit utilisation ratio and limit it to 30%.
The same logic can be applied when borrowing through overdraft facilities or line of credit or similar.
8. Correcting CIBIL report errors
If there’s an error in your CIBIL report, correcting it in time can save you from having a poor CIBIL score. This is among the key contributors to credit score and unfortunately, not a very uncommon one.
Follow the steps to rectify CIBIL errors:
- Register and login to your CIBIL account
- View your report and review it thoroughly to find errors
- Report disputes on the CIBIL portal as per the instructions provided
- Wait for rectification
It must be noted that, errors can be as basic as personal details error, or more impactful as duplicate record, incorrect entries etc. CIBIL score influences all future borrowing options, hence it is recommended to check CIBIL records once every quarter for any errors.
9. Maintaining a long-standing credit history
Of the vital factors affecting your CIBIL score, your credit history is a must. Put simply, it means how long you have been borrowing and repaying diligently.
For instance, if you had taken your first business loan in 2015 and repaid it in 2018, and also taken a machinery loan in 2017 and closed it in 2021, and having a business credit card since 2016 – it simply means you have had a long credit history. There are several benefits of having a high CIBIL score value and by maintaining a long credit history, your CIBIL score will be on the higher side.
A long credit history means:
- More trust among lenders
- A history of being a responsible payer
- Documentation in place and creditworthiness
- Less hassle and risk for the lender
As such, while it’s recommended to close your loan account and end all dues, if you have a credit card, it’s advisable to keep it and use it within the 30% credit utilisation ratio. In that way, you have a long credit history and maintain financial health by using a small portion of your credit limit. Of the factors affecting your CIBIL score, this is important as it helps to build long-term credibility.
The way ahead: How to fix a bad Credit score
Now that you know the key determinants of CIBIL score, your first step to maintain a good CIBIL record is to ensure that you don’t make these errors.
However, if your CIBIL score has gone down then here are some suggestions to help you improve it:
- Clear all your card dues and pay your EMIs as scheduled
- Check your credit report and ensure that any errors are rectified at the earliest
- Avoid taking multiple loans – instead prioritise your business needs and take a loan only if absolutely critical
- Check if you have co-signed any other credit option as a guarantor, in which case ensure that there are no missed payments on that account
- Try long term loans instead of short term loans so that your EMIs are smaller and you get to build a strong credit history gradually