How to Improve a Bad CIBIL Score?

A CIBIL score is a number between 300 and 900. Whenever you go to a bank to take a loan, the bank first checks your CIBIL score.

Who provides this CIBIL score? There are many companies, but the main one is TransUnion CIBIL. No matter which bank it is — suppose you apply for a loan in ICICI Bank or in HDFC Bank — the bank first asks TransUnion CIBIL what your CIBIL score is.

Now suppose you took a loan in the past and defaulted on it. In that case, your CIBIL score becomes very low. For example, it may drop to 550 or stay around 600. This is considered a poor CIBIL score. If your score is like this, the bank will most likely reject whichever loan you apply for.

On the other hand, if your CIBIL score is 750 or 800+, it is considered a very good score. If your CIBIL score is very good, then banks start chasing you, asking you to take a loan from them. So, I explained the simple concept of what a CIBIL score actually is.

Now a question arises

okay, we understand that if someone took a loan in the past and defaulted on it, their CIBIL score will decrease. And on the other hand, if someone took a loan in the past and repaid it on time without any issues, their CIBIL score will become very good. Now the question is, if someone has never taken a loan in their life, then what would their CIBIL score be?

In that case, their CIBIL score is shown as –1. –1 is simply a number that indicates that this person has never taken a loan before. Now, suppose someone with a –1 score goes to a bank and applies for a loan, then the request goes to the credit manager. When the credit manager checks the person’s CIBIL score from TransUnion CIBIL, the score will appear as –1. Then the bank’s credit manager will make the decision. They will decide whether to give the loan or not, and this decision will depend mainly on your current active income at that time.

If you have a job, the bank will ask you to show your ITR (Income Tax Return). If you are self-employed, they will ask for your complete bank statements, ITR and all. Then, based on your mode of business and financial profile, they will decide whether to give you a loan and, if yes, how much amount to approve.

Once you get your first loan and start repaying it, your CIBIL score begins to generate. Now, let’s come to the main point — how can we improve a bad CIBIL score.

Factors That Affect Your CIBIL Score

1.Payment History (35% Weightage)

If someone’s CIBIL score is already perfect, what mistakes should they avoid so that they don’t get damaged. Suppose someone’s CIBIL score is 800. The main company behind this is TransUnion CIBIL. Their concept is very clear and the process is fully automated. They say that the biggest weightage in calculating your CIBIL score, about 35%, is your payment history.

That means, if you have taken a loan, what is your payment history on that loan — did you pay your installments on time or not, etc. If you paid on time, then this 35% portion of your total score (which can go up to 900), which is roughly 300 points, depends on your payment history. If you have paid all your installments on time and managed everything properly, then you can earn nearly those full 300 points in your CIBIL score, only if you have been perfectly regular with all your EMIs so far.

But if you defaulted on a loan in the past, didn’t pay your installments on time, or your EMIs keep on bouncing, then this 35% weightage of your CIBIL score is at risk. So, the first and most important factor is payment history.

2. Credit Utilization Ratio (30% Weightage)

This also has significant weightage. Now, even a layman would say that the most important thing in a CIBIL score is whether you repaid your loan on time or not. In fact, most people think that CIBIL score only means whether you repaid your past loans properly. But, in reality, its weightage is 35%, not 100%.

The second biggest weightage, which is 30%, is the credit utilization ratio. For example, suppose you have a credit card with a limit of ₹1 lakh given by the bank. But out of that ₹1 lakh limit, you constantly use ₹90,000. The bill gets generated — then either you pay it in full, or you don’t. There are two situations: one is that you pay the full ₹90,000 outstanding amount (TAD). The other is that you just pay the minimum amount due (MAD) — suppose it is 5%, around ₹4,500 — and that’s it. You feel that since you paid the minimum due, your CIBIL score won’t be affected. Many people fall into this trap. They keep using 80% to 90% of their total credit card limit all the time.

If you are doing this, then this 30% weightage factor is at risk. Obviously, your CIBIL score will gradually start decreasing. We will now discuss all the other factors regarding how to improve CIBIL score as well, but before that, I’m giving you the basic knowledge of how a CIBIL score is calculated.

What should you do?

Ideally, it is said that whatever your credit card limit is — suppose it is ₹1 lakh — you should use only about 25% to 30%, or at most 35% of it. So, if your limit is ₹1 lakh, you should ideally use only around ₹25,000 to ₹30,000 (maximum ₹35,000). Do not use more than 25–35% of your credit card limit.

If you need to spend more, then increase your limit. For example, you can increase it from ₹1 lakh to ₹2 lakhs. Once your limit becomes ₹2 lakh, then 30% usage would mean you can use up to ₹60,000. The key point is that you must maintain your credit utilization ratio properly. This 30% weightage is a very big factor and works strongly in your favor if managed correctly.

3.length of credit history (15% Weightage)

Why is this mentioned again and again? Many people do this: suppose you have a credit card that you took 5 years ago. Now a new credit card comes into the market with much better features. What do people do? They close the old credit card and get a new one issued. But never make this mistake, because 15% weightage of your CIBIL score depends on the length of your credit history.

What’s the reason? If you have a credit card that is 5 years old, then your credit history shows as 5 years old. That long history works in your favor. Now, suppose you closed that old card and took a new credit card just one month ago. Then your credit history will show as only 1 month old. Do you understand the point?

In simple terms, you should always have at least one loan or credit account that has been running for a long time. For example, suppose you have a home loan for 30 years. It keeps running continuously, and you keep paying the EMIs regularly. If the loan has been active for 15 years, then you have a 15-year credit history. In that case, this 15% weightage remains fully strong.

Similarly, if you have an old credit card whose features are not very good, don’t close it. If you want better features, you can get a new credit card issued — but don’t close the old one. By keeping the old account active, this 15% weightage will continue to benefit your CIBIL.

In that case, it’s fine — you can close it. But if it’s a lifetime free credit card or its annual fee is just ₹500, then what’s the problem in keeping it active? Your credit history length remains long, which benefits your score.

4. Credit Mix (10% Weightage)

This means how many secured loans and how many unsecured loans you have. Secured loans include things like gold loans, car loans, and home loans. These are loans where, if the customer defaults, the bank has some assets as security. For example, a home loan is a secured loan because if someone defaults, the bank has the legal power under the SARFAESI Act to sell the property and recover its money. A car loan is also a secured loan. If someone defaults, the bank can repossess the vehicle and recover its dues.

On the other hand, personal loans and credit cards are unsecured loans. In these cases, the bank does not have any asset as collateral. If someone defaults, the bank does not have the power to seize an asset; it can only negatively impact the borrower’s CIBIL score. So, the more secured loans in your credit mix (managed properly), the better it is for your CIBIL score. If you have taken too many unsecured loans, then this will negatively impact that 10% weightage factor. There should be a proper mix — some unsecured loans and some secured loans. If you have only secured loans, that’s very good. But if you have only unsecured loans, that is not a good sign.

5. New Credit Applications (10% Weightage)

There are many videos on YouTube saying, “If you want to fix your CIBIL score, apply for this credit card. Apply for that one. But why? They even suggest applying only for unsecured credit cards. If one application gets rejected, apply for another. If that gets rejected, apply somewhere else. Keep applying again and again until you get one approved.

But when you repeatedly apply at different places, it results in what is called a hard inquiry. Hard inquiries negatively affect your CIBIL score. This factor also carries about 10% weightage. There are two types of inquiries: soft inquiry and hard inquiry. Soft inquiry is when you check your own CIBIL score frequently. This does not affect your score.

Hard inquiry is when you apply for a loan or credit product. For example, today you apply for a personal loan at HDFC Bank, and it gets rejected. Tomorrow, you apply for a credit card at SBI, and that also gets rejected. Then you apply somewhere else, and then somewhere else again. Every time you apply, the bank checks your CIBIL score. This is called a hard inquiry.

So far, we have discussed the steps you should follow if your CIBIL score is already good. Now let’s come to the main point: if someone’s CIBIL score has already become poor and they have defaulted on a loan, how can they gradually improve their CIBIL score?