When you approach a bank or NBFC for a business loan, your CIBIL score is the first thing they will check to determine your eligibility. But what components affect your CIBIL score? How is your credit report influenced by your earning and spending habits? How can you ensure that you maintain a high CIBIL score value? In this blog, we’ll explore the popular factors affecting your CIBIL score and your creditworthiness for availing a business loan.
Table of Contents
Repayment History
One of the most significant factors affecting your CIBIL score is your repayment history. This includes timely repayment of loans and credit card dues. Missing a payment or defaulting on a loan can drastically lower your CIBIL score. Consistent, on-time payments reflect positively on your credit report and can account for up to 35% of your CIBIL score.
Credit Utilization Ratio
Your credit utilization ratio is the amount of credit you use compared to your total credit limit. Ideally, you should keep your credit utilization below 30%. A high credit utilization ratio indicates a high dependency on credit, which can negatively impact your CIBIL score. For example, if your credit card limit is ₹1,00,000, try to keep your spending below ₹30,000.
Credit Mix
Having a diverse credit mix can positively influence your CIBIL score. This means having a combination of secured loans (like home loans or auto loans) and unsecured loans (like personal loans or credit cards). A varied credit mix demonstrates your ability to manage different types of credit, which can improve your credit score.
Credit Inquiries
Every time you apply for a loan or credit card, the lender will make a hard inquiry on your credit report. Multiple hard inquiries within a short period can lower your CIBIL score, as it may indicate that you are in desperate need of credit. To avoid this, space out your credit applications and only apply when necessary.
Credit History Length
The length of your credit history also plays a crucial role in determining your CIBIL score. A long credit history with a record of timely repayments can boost your credit score. It demonstrates your experience in handling credit over a significant period, making you a more reliable borrower.
Debt-to-Income Ratio
Your debt-to-income ratio is a measure of how much of your income goes towards paying off debts. A high debt-to-income ratio indicates that a significant portion of your income is being used to service debt, which can be a red flag for lenders. Ideally, your debt-to-income ratio should not exceed 30%. For instance, if your monthly income is ₹50,000, your debt payments should not exceed ₹15,000.
Settling Loan Accounts
Settling a loan means coming to an agreement with the lender to pay off a portion of the debt, which is considered as settled. While it may relieve you of immediate debt, settling a loan negatively impacts your CIBIL score as it indicates an inability to repay the full loan amount. This record stays in your credit report for up to seven years.
Loan Rejections
Repeatedly applying for loans and facing rejections can harm your CIBIL score. Each rejection is recorded in your credit report and can lower your score. It's important to understand the reasons for rejection and address them before applying for another loan.
Errors in Credit Report
Errors in your credit report, such as incorrect personal information or inaccurate loan details, can negatively affect your CIBIL score. Regularly reviewing your credit report and promptly correcting any errors can help maintain an accurate and healthy credit score.
Repaying Minimum Amount Only
Paying only the minimum amount due on your credit card bills can negatively impact your CIBIL score. It indicates that you are not fully able to manage your debts. While you may avoid late fees, the remaining balance continues to accrue interest, increasing your overall debt burden.
Maintaining a high CIBIL score is crucial for securing business loans with favorable terms. By understanding these key factors and taking proactive steps to manage your credit responsibly, you can ensure a healthy credit profile and improve your chances of loan approval. Regularly reviewing your credit report, making timely payments, and maintaining a balanced credit utilization can go a long way in boosting your CIBIL score.
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