The need for cibil scores and credit reports is to help financial institutions determine whether an individual is creditworthy and eligible to get a loan or credit card. Having a healthy credit score increases the chances of getting credit approval quickly. Many borrowers wonder about the effect of loan settlement on CIBIL score and how much time it takes to improve.
How much time is required to enhance the credit score after settlement?
In general, there is no particular time to rebuild a credit score. However, if the credit score is low, it will take longer to enhance. Having a credit score of 750 is considered ideal by most lending institutions while approving the loan request of a borrower.
On average, it usually takes about 4 to 12 months to build a good credit score and become loan-eligible. When the score ranges between 650 and 700, it can take several months to touch 750. However, if this score is not more than 650, it will take longer.
Unfortunately, there is no shortcut way for enhancing the credit score and building a healthy credit report. Here one needs to improve their financial behaviour, paying credit card bills and EMIs on time, opting for a credit mix, etc. to reach their objective. As soon as the loan is settled, the loan account gets written off in the CIBIL report and marked as ‘settled’, thereby causing an increase of almost 75 to 100 points in credit score.
However, before planning to improve the CIBIL score, a person needs to be cautious about the factors which are responsible for affecting this score.
Which factors affect credit score?
Mentioned below are some crucial factors that affect an individual’s credit score:
History of credit repayment
The credit history of an individual signifies their consistency and punctuality in making payments on time. Paying the monthly instalments of loans and credit card bills before the deadline considerably boosts the CIBIL score.
Credit mix
When it comes to credit mix, it signifies at least one secured loan account with a longer tenor, such as home loan. However, holding several unsecured loans like business loans, personal loans, etc. without any secured loan can negatively affect the CIBIL score.
Credit age
Credit age signifies the date since an individual got their first credit approval. The age or tenor of credit history accounts for almost 15% of the entire credit score. This means the average credit score can enhance due to a longer account history down the line.
Credit utilisation ratio
This signifies the total credit limit a person is worthy of and how much he/she has used against it. The less amount utilised, the better the credit score will be of the individual. Credit cardholders should keep their monthly credit card usage between 30% and 50% of their limit, or else they can come into financial distress as it adversely affects the CIBIL score.
Errors in credit reports
Credit reports keep information regarding the present and past credit accounts of an individual wherein a small discrepancy can affect the CIBIL score. Thus, individuals should check credit report regularly. This way they will be able to spot the errors on the report and dispute the same to the credit reporting company to fix it.
Recurrent opening of new credit accounts
The recurrent opening of new credit accounts signifies that a person’s current loan accounts are not enough to meet their financial need. This ultimately increases the likelihood of a higher credit burden on the borrower in future resulting in lessening the CIBIL score.
After knowing how to improve CIBIL score after loan settlement and the factors affecting this score, take a look at the importance of maintaining a high CIBIL score.
What are the advantages of a healthy CIBIL score?
Following are the benefits one can get by maintaining a high CIBIL score:
- Helps in increasing credit limit
- Facilitates quick loan or credit card approval
- Helps in getting easy payment terms from lenders
- Provides attractive interest rates on loan offers
- Helps an individual get a long-term loan
Knowing about the effect of loan settlement on CIBIL score may help an individual improve their credit score thereby building a healthy credit report. Furthermore, borrowers should prudently manage their accounts which is essential to maintain a proper reputation alongside increasing the chances of availing a loan in future.