Several across the country face extensive difficulty in availing loans or credit cards due to poor credit scores and the inability to manage the situation due to lack of adequate knowledge on the complicated financial matters. While the common populous is familiar with the term CIBIL score, many might lack the proper understanding and significance of the CIBIL score. Even individuals who can track their CIBIL score require to monitor their credit reports regularly, which might drop due to incorrect information submitted to credit bureaus.
Credit Information Bureau (India) Limited (CIBIL) is the credit rating firm that has over 2400 members including financial institutions, NBFCs, banks, and home financing businesses. It manages the credit history of over 550 million customers and organizations. Though the CIBIL has no say in whether a financial institution will be approving a loan or credit card, it plays a major role in building the primary and immediate impression of the borrower. Hence, a higher CIBIL score creates greater chances of a loan being granted. With a lower CIBIL score, even if the loan is being granted, the interest rates might be imposed at a much higher rate than normal. However, with much poor CIBIL rating, it is most unlikely that a bank or a non-banking financial company (NBFC) will lend money to the applicant or approve a credit card.
Let’s explore some of the best and essential habits to maintain a healthy credit score for better financial planning.
Planning the priorities
Financial goals must always be carefully planned and through a thorough analysis of the credit possibilities, the expenses should be prioritized. Most experts will suggest that the income to EMI ratio should always be within 30 per cent to efficiently manage the expenses towards EMIs or credit card payments. Also, the credits should never be misused or overused and taken out only during emergencies to maintain financial balance with a steady CIBIL score.
One of the best strategies to maintain a good CIBIL score is to repay the debts on time. This way the borrower can make a positive impression on the lender and creates opportunities for further borrowings. In a simple way of stating, outstanding debts are the primary reason behind the CIBIL scores getting lower and an individual should manage their spending through credit cards or by opting for a loan in accordance with their income and ability to payback within the stipulated time limit.
Strategizing a good budget by keeping track of monthly expenses, anticipated bills, loan obligations and repayments and setting aside a certain amount of money for unpredicted circumstances is a key strategy to keep away from taking credits or missing out on repayments of debts; thereby avoiding any major financial distress. While credit cards can come to the rescue during financial turmoil, not managing them properly might lead to bigger problems; hence a slow but steady saving and budget management is always a safer option.
Tracking credit utilization ratio
The credit utilization ratio is calculated by dividing the currently used revolving credit with the total revolving credit available; or in simpler words, it’s how much the current credit expenditure is as compared to the total credit limit. Maintaining a healthy credit utilization ratio becomes an important factor in maintaining a healthy CIBIL score. Experts suggest using just 30 per cent of the total credit to avoid risks of penalties.
Being credit conscious
Just like a saving-conscious person keeps track of finances by regularly reviewing the bank statements and investment portfolio, responsible credit borrowers should also keep track of their credit profiles by regularly tracking their CIBIL scores. This way, borrowers can maintain a healthy credit score by being alert of defaults and payment delays.
Balanced mix of credit
There should always be a balanced mix of credits. When the credit score drops, people often tend to cancel the credit card and apply for a new one; this may reflect negatively on the CIBIL score. According to experts, there should be a balanced mix of secured and unsecured credits to maintain a good score.
To understand the entire process of financing through loans and credit cards might not be a single-day task and can be very confusing or complicated primarily. However, to make the best use of such personal finance tools, maintaining a good credit habit and a clean credit profile can be the key.
By Mr. Mahesh Shukla, Founder & CEO, PayMe India