CIBIL score is a key factor that banks consider at the time of evaluating an individual’s creditworthiness. While savings and investments themselves do not directly impact your CIBIL score, they indirectly affect it through various financial behaviours.
The factors which actually impact the credit score, also known as CIBIL score, include the payment history, debt to income ratio, ability of loan repayment, credit mix and credit utilisation ratio.
Let us understand these terms in greater detail here:
Payment History: Regular contributions to savings and investments show financial discipline. This shows positively on your payment history, which is a key component of your CIBIL score. Regular payments on loans, credit cards, and other obligations contribute to a good credit score.
Debt-to-Income Ratio: Savings and investments can affect your debt-to-income ratio, which is an important factor considered by lenders. If you have substantial savings and investments, it shows financial stability and a lower reliance on credit. At the same time, if someone has a lower debt-to-income ratio, it shows lower credit risk and can positively impact your CIBIL score.
Credit Utilisation Ratio: Savings can also impact your credit utilisation ratio, which implies the amount of credit you are using out of the total available credit.
By having savings to cover expenses, you may be less likely to rely heavily on credit cards or loans, leading to a lower credit utilisation ratio. A lower ratio is seen favourable for your credit score.
Loan Repayment Capacity: Investments such as fixed deposits, mutual funds, or stocks can improve your loan repayment capacity. Banks may see these investments as additional financial resources that can be liquidated if needed to repay loans. This can impact influence your creditworthiness and CIBIL score.
Credit Mix: While savings and investments do not directly impact credit mix, they can indirectly diversify your financial portfolio. Having a diverse mix of credit types, such as loans, credit cards, and savings or investments, can positively impact your credit score by demonstrating your ability to manage various financial products responsibly.
Frequently Asked Questions:
What is secured credit card?
Secured credit cards require a security deposit, which typically becomes your credit limit.
What is the best way to use a secured credit card?
It is advisable to treat your secured credit card just like any other credit card. One should use it for small purchases that one can afford to pay off each month.
What is credit mix?
This refers to the different credit accounts you have on your credit report. These include car loans, credit cards, student loans, personal loans, among others.
Does it affect the credit scoring model?
A number of credit scoring models consider the diversity of your credit accounts at the time of calculating your credit score.
What are the factors on which the impact of credit mix on credit score is based on?
The impact of credit mix on your credit score can vary based on individual circumstances and the particular credit scoring model that is being used.
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Published: 09 Apr 2024, 08:58 AM IST