While applying for a business loan, all lenders check the Credit score of the businessman. The CIBIL or credit score is an important eligibility criterion. The loan lenders only approve the loan application if the business owner has a high CIBIL score. There are various factors that affect the credit score. And in order to get the loan application approved, the business owner must get know these factors and high CIBIL score.
What is a Credit Score?
also read: DID YOU know these facts about CIBIL SCORE?
A credit score is a number that ranges between 300 and 900. It is a numerical representation of the creditworthiness of the individual. A high CIBIL score means that the borrower is credible and a low CIBIL score means that the borrower is risky. According to the credit score, the businessman will either approve or disapprove the loan application.
This score is determined by CIBIL TransUnion. There are various factors that they consider to determine the CIBIL score. The following are such factors:
- Debt-income ratio
- of outstanding loans
- of times applied for loans
- of loan defaults and cheque bouncing instances
The score helps in determining the borrower would be able to repay a loan or not. Now that you the importance of credit score, let’s take a look at how the SME owner can maintain a good CIBIL score.
How to maintain the CIBIL Score?
Know what Counts in Score
One important factor that helps in maintaining score is to know what all counts. Knowing what all can or will affect the score will make it easier to maintain a high score. The five key points to determine the score are –
- Level of existing debt
- Payment history
- Recent credit
- Credit age
- Mix of credit
Bills on Time
Paying bills on time depict healthy financial behavior. The lender will perceive if you pay bills on time, you will pay the loan EMIs on time as well. Not paying bills on time impacts negatively impacts a credit score. Every unpaid or late paid bill is reported. So, pay your bills on time. And if you are already paying it on time, continue doing so.
Ideally, you should pay your bills at least 5 days before the due date.
A higher credit card balance in relation to credit limit worsens the credit limit. An ideal credit ratio should not be more than 30%. This will help in maintaining a good credit score. The idea behind a low credit ratio is that the more you use credit balance, the more you are habitual of living under the credit.
Old Credit Card
When a credit card is closed, the credit card issuing company no longer sends its details to the credit evaluation bureaus. The impact of the closed card is removed from the credit report after 10 years. You must not close your old credit cards. The older your credit card and its bills, the more positive it impacts the score.
Also, closing credit card lower downs the credit limit. For instance, if you three credit cards each with the limit of INR 20,000. According to the debt-credit ratio, you can use 18,000 (6,000 is 30% of every card) every month. But if you close a card, your limit will be decreased to just 12,000.
There are times when some wrong information is entered in the CIBIL report. And if there really is some wrong information entered, it must be removed. So, it is important to keep an eye on the credit report and ensure that no wrong information is entered in it.