7 Proven Strategies to improve your CIBIL Score
Your CIBIL score is more than just a number; it’s your financial reputation. This three-digit score plays an important role in determining your creditworthiness and impacts your eligibility criteria for various loans, credit cards, and other financial products. Maintaining a good CIBIL score is essential for accessing credit facilities and favourable interest rates. We will walk through seven proven strategies to improve your CIBIL score gradually, helping you unlock a world of financial opportunities.
Questions to Ask Yourself as a Borrower to improve your CIBIL Score for Loans
1. Set Reminders or Standing Instructions to Repay Loan EMIs on Time
Your credit score takes a hit when you miss or delay loan EMI payments. It’s crucial to be punctual in repaying your loans, whether it’s a personal loan, home loan, or business loan like a working capital loan. To avoid penalties and maintain a good CIBIL score, consider setting reminders or adding Standing Instructions (SI) to your bank account. SI ensures that a fixed amount is deducted at regular intervals, ensuring timely EMI payments.
2. Clearing Credit Card Dues Promptly
Credit card dues can significantly impact your CIBIL score if not paid promptly. Missing the due date reflects negatively on your credit report. To prevent this, strategize and clear your credit card balances before the due date. Even if you can’t pay the entire amount, ensure you clear the minimum due to avoid reporting non-payment to credit bureaus. Moreover, the interest levied on credit card dues is one of the highest and is a major indicator of default risk, the presence of which may prove disastrous to your small business loan application.
3. Regularly Check and Rectify CIBIL Report Errors
CIBIL reporting is mandatory for all RBI-registered lenders. The lenders are tasked with reporting the loan performance of the borrowers to the concerned bureaus which may have inconsistencies. The most common inconsistencies are incorrect personal information, mismatched overdue amounts, or duplicate accounts. These errors significantly affect your credit score. To correct these, one can get the proofs from lenders and submit it as a query resolution to the respective bureau.
4. Limit Multiple Credit Applications
Every credit application generates either a soft or hard inquiry on your credit report. Multiple hard inquiries within a short time may lower your credit score, as lenders may perceive you as credit-hungry. Carefully research and compare credit options before applying. If your credit score is low, focus on improving it before applying for new credit.
5. Choose a secured Credit Card over an unsecured credit card
Secured credit cards can be a lifeline for rebuilding credit. If your credit history includes settled accounts or non-repayments, lenders may be hesitant to issue credit cards or loans. Secured credit cards, backed by a fixed deposit, can be approved without considering your credit score. Use this card responsibly, make timely payments, and gradually rebuild your creditworthiness.
6. Keep Old Credit Card accounts active
A longer credit history and consistent, on-time payments enhance your creditworthiness. If you have an old credit card account, even if you no longer use it, consider keeping it active. This shows responsible credit management and can positively influence your credit score when applying for future credit.
7. Regularly Monitor Co-signed or Guaranteed Loans
Co-signing or guaranteeing a loan makes you equally responsible for repayments. Late payments or defaults by the primary borrower can harm your credit score as well. Regularly monitor co-signed or guaranteed loans, ensuring timely payments. Communication with the borrower is crucial to address any defaults promptly.
The above strategies work well for business as well as personal credit ratings. However, the commercial credit rating is highly sensitive with respect to the following parameters.
Overutilization of Credit Lines and Overdraft Facilities
For businesses, overutilization of credit lines and overdraft facilities can be detrimental to the CIBIL score. The most common error is not keeping the buffer for the interest to be booked in the account at month’s end. One can plan to defer payments in the next week or manage the working capital efficiently to not land in this phase. A business that consistently uses a high percentage of sanctioned credit, raises concerns about its financial stability and ability to manage debt.
The credit mixture between Secured and Unsecured Loans
Maintaining a balanced ratio between secured and unsecured loans is essential. Too much reliance on unsecured loans might signal financial instability, impacting the credit score negatively. Lenders prefer a mix that demonstrates prudent financial planning and management.
The ratio of Missed Payments Over the Last 12 Months
Missed payments within the last 12 months can significantly lower a business’s CIBIL score. Lenders perceive consistent and timely payments as a sign of financial responsibility. Any missed payments, even if occasional, can adversely affect the score.
Delayed Payments if Any
Consistent delayed payments on loans or credit lines can severely damage a business’s credit score. Lenders consider delayed payments as a sign of financial strain and an inability to meet financial commitments promptly.
Additional Factors for Consideration to improve your CIBIL score for business loan
Choosing a Longer Repayment Tenure: Opting for a longer loan tenure can reduce your EMI burden and improve your EMI-to-NMI ratio, positively influencing your credit score.
Increasing Credit Limit Responsibly: Request credit limit enhancements from your credit card provider while using credit wisely to maintain a low credit utilization ratio.
Maintaining a Healthy Credit Mix: Balancing unsecured credit like credit cards and secured loans like auto loans can demonstrate responsible financial management.
Your CIBIL score is a crucial factor in determining your financial health and opportunities. By implementing these strategies and considering the additional factors, you can gradually improve your CIBIL score for business loan. As your credit score improves, you’ll be better positioned to get loans and credit cards with favourable terms, paving the way for a more prosperous financial future. Unlock the potential of a strong CIBIL score and seize control of your financial destiny.
About Red Fort Capital
Red Fort Capital is dedicated to empowering Indian MSMEs (Micro, Small, and Medium Enterprises) on their path to business growth through customized business loans. We understand that securing a business loan in India can pose significant challenges, particularly when factors like a less-than-ideal credit score, a relatively short business history, unclear financial records, or variable cash flow come into play.
As a respected Non-Banking Financial Company (NBFC), we take pride in offering a diverse range of secured business loans, spanning from 1 to 10 Crores. What sets us apart is our remarkable ability to disburse funds fast, in just 7 days. Our financial solutions are meticulously designed to cater to a spectrum of needs, including working capital requirements, equipment and machinery purchases, invoice/bill discounting, and last-mile financing, among others.