In this world, where living on credits is not a taboo anymore, we all should understand both the sides of the coin. Credit just doesn’t mean money borrowed from someone or anything like that. A credit would include any loan taken from an authorized financial organization say a bank or an NBFC (Non-Banking Financial Institution).
It also will include the credit cards that are being used. So the credit limit of the credit card that has been taken is considered as the credit amount in total. When talking about credit cards, one should understand that it a revolving line of credit; i.e. after payment of the credit card amount used, the credit line is again set to the previous basic limit. Things to be taken care for a credit card is that always a minimum payment won't work. One has to pay the full amount and only then the credit limit will be restored.
Why do we need to understand so much in depth about credits? The reason is a credit score. This three-digit number ranging from 300-900 which is made from five parameters, Amount Owed, Payment History, Mix of Credits, Length of Credit Account and New Credits plays an important role while applying for a new credit which may be in the form of loan or credit card and it’s limit. Basically, it will show the creditworthiness of the individual. From this 300-900 range, any score above 750 is considered good. Anything between 600 to 750 is average and below 600 is considered low.
In India, we have different credit bureaus who would provide with the credit score. Transunion CIBIL, commonly known as CIBL and the first ever credit bureau established in India. Equifax, Experian and CRIF Highmark. Since CIBIL was the pioneer in this, many people may say CIBIL score instead of Credit score. With this basic understanding about credits, let us now say, it an individual has a low cibil score, what are would be the ways to improve them?
Maybe there would be a genuine reason why a borrower may not be that successful in making the dues. Or maybe with sheer carelessness they would not have made payments for either the loan EMIs or the credit card bills. In such case, the first thing to do is clear the old dues as soon as the borrower can so that would stop any further damage that could cause a dip in the score.
As a new line of credit is one of the parameters in calculating a credit score, one may apply a new line of credit and take a small amount of credit to repay the older dues. This would help the borrower in both the criteria for improving the score.
The easiest and one of the fastest ways improve the score is a usage of credit score. A credit card has a monthly cycle of repayments, so the credit line is as less as one month. Just by maintaining the decorum, and using and paying the credit card bill will be must faster way to get an improvement in score.
with the usage of the credit card one thing that has to be taken care for is the utilization ratio. It is considered healthy when maximum 30% to 35% of the total limit allocated to the card is used. So, for example, the credit limit of the card is 1,00,000 Rs, then it is advisable to use a maximum of 35,000 to maintain a good credit score. If in case, the borrower has more usage, they can apply for an additional card and club the two limits by individually swiping them!
Length of the credit line is also a parameter of the score. So, one should make sure, that older the account, better is the score. And keeping this in mind, they should not close the older account thinking it is of no use and hence to close it.
Improving a low cibil score must be a slow process, but it is no rocket science to shoot it up again. With basic patience and responsibility towards the repayments will definitely work. The mere negligence towards the credit line may have put the shift in the score turning it into the low score.