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CIBIL score, also known as credit score, is provided by Credit Information Bureau (India) Ltd (CIBIL). There are also other agencies that provide credit scores.
The three-digit CIBIL score defines an individual’s creditworthiness. The CIBIL score range is between 300 and 900. The credit score gives an idea of whether you will be able to repay the loan amount with interest on time.
It is mandatory to fulfill the lenders eligibility criteria to obtain a sanctioned loan. Apart from general criteria such as age, annual income and job requirements, credit rating is a prerequisite that you should check before applying for a loan. This is one of the main factors your lender evaluates when reviewing your loan application.
Reasons why your credit score may drop
Here are some reasons why your score may fall below the desired CIBIL score range.
Frequent loan requests: Applying for loans frequently can lower your credit score. When a person applies for a new loan, lenders often write a detailed credit score report. New credit report inquiries represent 10% of credit score. A serious investigation can temporarily reduce the credit rating. This will usually return to normal after regular EMI refunds.
It is best to avoid applying for multiple loans to reduce the number of difficult inquiries about your credit report.
Credit utilization rate: Your credit score range may be well below your desired range if you have a high credit utilization rate. Credit card transactions are considered in this scenario. It’s best to use around 30-50% of the available credit limit on the card.
If a large percentage of this total credit is used each month, this indicates that this customer is dependent on credit to pay their bills. Even if balances are paid on time, if you have made large purchases, it will negatively impact your credit score.
Irregular EMI payments: If you miss or delay an EMI payment for a month, it will lower your credit score. Missing even one EMI payment hurts the score.
Your payment history and your financial behavior over a period of time are the two important factors that determine your credit score. So, making late payments or not making payments on your loans will negatively affect your CIBIL score.
Closing an existing credit card: Your credit rating will drop if you close an existing credit card with a balance. Maintaining a long history is necessary for a higher credit score. Closing a credit card that has been used for a long time gives lenders the impression that you are a high-risk borrower. This can lower your credit rating.
Average age of credit lines opened: The rating models take into account the seniority of the credit lines opened in the calculation. Credit agencies consider a person who maintains a credit account longer to be more trustworthy.
If a customer closes a credit card or if a lender cancels one, it will shorten the active history and therefore the CIBIL score will decrease. If you open a new account, it will lower the average of your accounts. This too will not help improve scores.
Changes in the credit score formula: Determining a customer’s credit is a complex matter. Agencies are trying to refine their formulas to make them a better indicator of a person’s credit risk. Different agencies use older and newer versions all the time. When a new, slightly modified credit score formula is used, it will impact a person’s credit score.
Tips How you can prevent your CIBIL score from dropping
Here are some tips to avoid lowering your CIBIL score.
- Make timely payments of your credit card bills, which will help you maintain a good credit rating and avoid late payment charges on the bill.
- Pay your credit card dues in full and not in installments to avoid interest being added to your bill and increase your credit score.
- Keep the credit utilization rate below 30% to boost the score.
- Avoid settling your debts with your lender at all costs to maintain good credit health.
- Always maintain a high enough spread between your loan applications to assure lenders that you are not chasing credit.
Check your credit report online and see if there are any discrepancies. If you found any, report them in time to prevent your score from dropping.