Your CIBIL score plays a vital role in determining your eligibility for loans and credit cards in India. This three-digit number, ranging from 300 to 900, reflects your creditworthiness and financial behavior. A high CIBIL score (usually above 750) increases your chances of securing loans at favorable terms, while a low score can restrict access to credit, result in higher interest rates, or even lead to loan rejections.
But what causes a CIBIL score to drop? Understanding the common mistakes that lead to a low CIBIL score and how to correct them is essential for maintaining a healthy financial profile.
In this blog, we'll explore the reasons behind a low CIBIL score and provide actionable steps to help you improve it.
Common Mistakes That Lower Your CIBIL Score
1. Missing or Delaying Payments
One of the most significant factors that impact your CIBIL score is your payment history. Late payments on credit card bills, loans, or EMIs indicate financial irresponsibility. Even a single missed or delayed payment can cause a significant drop in your score.
Correction: Set up automatic payments or reminders to ensure you pay all your dues on time. Consistently paying your bills before the due date demonstrates reliability and gradually boosts your score.
2. High Credit Utilization Ratio
Your credit utilization ratio is the amount of credit you're using compared to your total credit limit. A high credit utilization ratio (over 30%) suggests that you are heavily reliant on credit, which can lower your CIBIL score.
Correction: Keep your credit utilization ratio below 30% by limiting your credit card spending or requesting a higher credit limit. Paying off balances in full each month also helps in maintaining a low utilization rate.
3. Multiple Hard Inquiries in a Short Time
Each time you apply for a loan or credit card, the lender checks your CIBIL score, leading to a hard inquiry. Multiple inquiries in a short period indicate credit-hungry behavior, which negatively impacts your score.
Correction: Avoid applying for multiple credit products simultaneously. Instead, space out your credit applications and only apply when necessary to minimize the impact on your CIBIL score.
4. Defaulting on Loans or Settling Debts
Defaults or loan settlements indicate financial instability and significantly reduce your CIBIL score. A "settled" status on your credit report suggests that you have partially repaid a loan, which is viewed negatively by lenders.
Correction: Aim to pay off your debts in full rather than opting for settlements. If you're facing financial difficulties, consider negotiating with your lender for a more manageable repayment plan instead of defaulting.
5. Not Checking Your Credit Report Regularly
Errors on your CIBIL report, such as incorrect personal details, wrong account information, or fraudulent transactions, can lead to a lower score. Many people fail to check their credit report regularly, missing the opportunity to correct these errors promptly.
Correction: Review your credit report at least once a year. If you spot any discrepancies, dispute them immediately with CIBIL to ensure your score is accurate.
6. Ignoring Old Debts or Overdue Payments
Old debts or overdue payments that remain unresolved can continue to harm your CIBIL score. Even if the amount is small, unpaid debts or bills reflect poorly on your creditworthiness.
Correction: Clear all outstanding debts or payments, no matter how small. Regularly check for any missed payments or dues and address them promptly.
7. Having a Poor Mix of Credit
Your credit mix, which includes secured (like home loans) and unsecured loans (like personal loans or credit cards), affects your CIBIL score. Relying solely on one type of credit can lower your score, as lenders prefer a balanced credit portfolio.
Correction: Maintain a healthy mix of secured and unsecured credit to demonstrate your ability to handle different types of credit responsibly.
8. Closing Old Credit Accounts
Older credit accounts with a positive repayment history can boost your CIBIL score. However, closing them can shorten your credit history and negatively impact your score.
Correction: Keep your oldest credit accounts open, especially if they have a good payment history. This will lengthen your credit history and improve your score.
9. Co-Signing a Loan and Ignoring the Consequences
When you co-sign a loan, you are equally responsible for repaying it. If the primary borrower defaults or delays payments, your CIBIL score will also be affected.
Correction: Be cautious when co-signing loans. Monitor the loan account regularly and ensure that payments are made on time.
10. Frequent Balance Transfers
While balance transfers can help manage debt, frequent transfers can indicate financial stress to lenders. If you repeatedly transfer balances without clearing them, it could negatively affect your CIBIL score.
Correction: Use balance transfers sparingly and aim to pay off the debt rather than shifting it around. This will demonstrate financial stability and improve your score over time.
How to Correct Common Mistakes and Improve Your CIBIL Score
1. Create a Repayment Plan
Develop a structured repayment plan to pay off outstanding debts, clear overdue payments, and ensure timely repayment of current dues. Stick to your plan diligently, and prioritize high-interest debts to reduce your credit burden.
2. Set Up Payment Reminders
Automate your bill payments or set reminders for due dates. Ensuring timely payments will help maintain a positive payment history and improve your CIBIL score.
3. Maintain a Healthy Credit Utilization Ratio
Aim to keep your credit utilization ratio below 30% by tracking your spending and making extra payments whenever possible. This shows lenders that you are not overly dependent on credit.
4. Regularly Monitor Your Credit Report
Make it a habit to check your CIBIL report regularly. Identifying and disputing errors promptly can prevent your score from dropping due to inaccuracies.
5. Opt for a Healthy Credit Mix
Maintain a balanced credit portfolio by including both secured and unsecured credit types. This demonstrates your ability to manage diverse credit responsibly and positively impacts your score.
6. Use Credit Cards Wisely
Use your credit cards strategically by limiting spending to what you can repay each month. Avoid unnecessary purchases and pay off your balance in full to avoid interest charges and improve your credit score.
7. Consider a Secured Credit Card
If you have a low CIBIL score and struggle to get approval for traditional credit cards, consider using a secured credit card backed by a fixed deposit. Responsible use of a secured credit card can help you build or rebuild your credit history.
8. Communicate with Your Lenders
If you're facing financial difficulties, don’t hesitate to contact your lenders. They may offer alternative repayment options, such as extended repayment periods or lower EMIs, to help you manage your debt without defaulting.
Conclusion
Your CIBIL score is a reflection of your financial habits and creditworthiness. By understanding the common mistakes that lead to a low score and taking corrective actions, you can gradually improve your creditworthiness and open the door to better financial opportunities.
Whether it's paying bills on time, reducing credit utilization, maintaining a diverse credit portfolio, or regularly checking your credit report, each step plays a crucial role in boosting your CIBIL score.
Make a conscious effort to avoid these common pitfalls and stay proactive in managing your credit health.
Need Help Correcting Your CIBIL Score? If you’re unsure where to start or need expert advice, consider reaching out Quicksettle who can guide you through the process and help you achieve a healthier credit profile
Frequently Asked Questions (FAQs)
What is the ideal CIBIL score for getting a loan?
An ideal CIBIL score for getting a loan is typically 750 or above, which increases your chances of loan approval and favorable interest rates.
How often should I check my CIBIL report for errors?
You should check your CIBIL report at least once a year, or more frequently if you're planning to apply for credit.
Can I improve my CIBIL score quickly?
While there's no instant fix, you can improve your score by correcting errors, making timely payments, and managing your credit utilization ratio effectively over time.
Does closing old credit accounts impact my score?
Yes, closing old credit accounts can shorten your credit history and negatively affect your score. It's best to keep older accounts open if they have a positive repayment history.
How do I dispute errors on my CIBIL report?
You can dispute errors by logging into the CIBIL website, navigating to the dispute resolution section, selecting the type of error, and providing the correct information along with supporting documents.
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