How is the CIBIL Score Calculated?
The CIBIL score is calculated on the basis of various factors like repayment history, credit utilization, loan tenure, type of credit and credit inquiries.
All these factors reflect the quality of debt you have or had and how responsible or irresponsible you have been in dealing with it.
The treatment of past debts including loans and credit card borrowing contribute to a person’s credit score. Irregular banking habits like delayed credit card payments or missed/delayed EMIs have a negative impact on the credit score.
If one relies too heavily on unsecured loan like personal loans and credit card borrowing then it is not a good sign for your credit score.
Similarly if you are in the habit of swiping your credit card too much which causes the total amount due at the end of the billing amount to be high in ratio as compared to the sanctioned credit limit, it will have an adverse impact on the credit score.
Other factors like whether one is credit hungry which is reflected by a high credit utilization ratio, too many inquiries for loans also contribute in making or unmaking of the credit score.
If the COVID pandemic has affected your finances, it is likely that 3 out of the above 5 factors have been affected.
If you don’t have a regular income stream and no contingency fund to dip into, it is possible that you won’t have money to pay your EMIs. This has an impact on your credit history causing your CIBIL score to drop.
The RBI has announced a 6 month moratorium on EMI payments which will have no impact on your creidt history. This should give you a breather but watch out for lenders who are handling this on a case-by-case basis.
Also, you still accrue interest, which will increase your monthly payments when the deferral period ends. But at least your credit score should remain intact. (FOR NOW). It is also possible that there are inaccuracies in reporting when lenders upload credit information during the moratorium period. It is important to check you credit report every month during this period.
Maxing Out your card limit
If you have available credit on your credit cards, and you need money, you may want to use your credit card limit and make minimum amount due payments(rather than pay the card dues off in full).
But credit cards typically charge very high interest rates. This increase your outflow and also increases your card limit utliization ratio.
This can decrease your CIBIL score While it’s natural for some people to fall back on credit cards, especially during a crisis like the one we’re in now, if at all possible, try to put them aside.
This is the time to dip into your contingency fund, if you have one. If you have saved money for other things such as for a holiday or a new device, it might be worth dipping into these savings now rather than relying on credit.
Remember, credit is debt that has to bepaid back!
Applying for new loans
During these trying times, you may try to apply for new loans and credit cards. While this is understandable, it does increase the number of inquiries on your credit report, which reduces your credit score.
New loan inquiries which don’t convert into loans are viewed negatively by lenders. They see this as a sign of financial trouble and reject your loan application.
Instead of taking out new credit, this might be a good time to consider transferring yor loan balances to a lower rate lender, especially because interest rates have gone down.