A good credit score is crucial for financial stability. Whether you’re applying for a home loan, personal loan, or credit card, your CIBIL score determines your eligibility and the interest rates offered by lenders. One of the most effective ways to increase your CIBIL score is by maintaining a low credit utilization ratio. In this article, we’ll discuss the importance of credit utilization, its impact on your credit score, and four key strategies to boost your CIBIL score effectively.
Credit Score Increase Know 4 Important Things
| Factor | Details |
|---|---|
| What is Credit Utilization? | The percentage of your available credit that you use. Ideally, it should be below 30%. |
| Impact on CIBIL Score | High credit utilization negatively affects your score, while low usage improves it. |
| Best Practices | Timely bill payments, reducing credit dependence, keeping old accounts active, and regular credit monitoring. |
Maintaining a low credit utilization ratio is a simple yet effective way to improve your CIBIL score. By following responsible financial habits like timely payments, avoiding multiple loan applications, and keeping old accounts active, you can boost your creditworthiness and unlock better financial opportunities.
Understanding Credit Utilization and Its Impact on Your CIBIL Score
What is Credit Utilization?
Credit utilization refers to the portion of your total available credit limit that you use at any given time. For instance:
- If your credit card limit is ₹1,00,000 and you use ₹30,000, your credit utilization ratio is 30%.
- If you consistently use more than 50-60% of your available credit, lenders may see you as a high-risk borrower, potentially reducing your CIBIL score.
How Credit Utilization Affects Your CIBIL Score
Your credit score is calculated based on multiple factors, and credit utilization plays a crucial role:
- High utilization (>50%) may indicate over-dependence on credit, leading to a lower score.
- Low utilization (<30%) signals responsible credit behavior, helping improve your CIBIL score.
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4 Important Things to Increase Your CIBIL Score
1. Keep Your Credit Utilization Below 30%
Experts recommend keeping your credit utilization ratio below 30% to maintain a good CIBIL score.
Practical Tips:
- If your credit limit is ₹1,00,000, try to use ₹30,000 or less per billing cycle.
- If you need to make a large purchase, consider spreading it across multiple credit cards.
- Request a higher credit limit from your bank but avoid using the additional credit recklessly.
2. Pay Bills on Time to Avoid Late Payments
Your payment history contributes to 35% of your CIBIL score. Late payments and defaults can significantly lower your credit score.
Best Practices:
- Set up auto-debit for your EMIs and credit card payments.
- Avoid minimum due payments, as they can lead to high interest charges and increased debt.
- Pay at least 5 days before the due date to ensure timely processing.
3. Avoid Multiple Loan and Credit Card Applications
Every time you apply for a loan or credit card, lenders check your CIBIL score through a hard inquiry, which temporarily reduces your score.
What You Should Do:
- Apply for new credit only when absolutely necessary.
- Compare loan offers before applying to avoid multiple hard inquiries.
- If rejected, wait before reapplying to improve your creditworthiness first.
4. Keep Old Credit Accounts Active
The length of your credit history plays a significant role in your CIBIL score. A longer credit history can improve your score, while closing old accounts may reduce it.
Why This Matters:
- An older account shows a long credit history, which is favorable for lenders.
- Closing old accounts reduces your total credit limit, thereby increasing your credit utilization ratio.
- If you must close an account, close the newest one first while keeping older ones open.
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Credit Score Increase FAQs
1. What is a good CIBIL score?
A CIBIL score above 750 is considered excellent and increases your chances of getting loans at low interest rates.
2. How long does it take to improve a low CIBIL score?
It depends on your financial habits, but consistent on-time payments and low credit utilization can show improvements within 3-6 months.
3. Can checking my own credit score lower it?
No. Checking your own credit score is a soft inquiry and does not impact your score. However, lenders making a hard inquiry can reduce it.
4. Can I improve my CIBIL score by increasing my credit limit?
Yes. A higher credit limit reduces your credit utilization ratio, improving your score if you don’t increase spending.
5. Is it bad to have multiple credit cards?
Not necessarily. Having multiple cards can help with credit utilization, but overspending and late payments can hurt your score.
