Factors That Can Ruin Your CIBIL Score

What is a CIBIL score?
CIBIL score is a number that depicts a consumer’s creditworthiness, it is represented in a numerical value between 300-900. The higher the credit score, the more attractive the borrower is to the lender.
Lenders like banks prefer to sanction a loan/ give a credit card to people whohave a score of 750 or above.
While the main elements of score composition revolves around loan and credit card repayment, CIBIL score is deduced from various elements (like payment history, credit exposure, length of credit history, types of credit and credit inquiries) and each of these elements have a different weightage.

Below mentioned are factors that can impact your CIBIL score negatively:

1. Making late payments / missing the due date 
One should always be prompt with repayments because if you miss the due date of payment evenonce for your credit card / loans, it will be visible in the credit report along with the number of days for which the amount remained unpaid post the due date. The credit history takes at least 6 – 8 months to improve.
The repayment history accounts for 35% of your CIBIL score. 

2. Not maintaining a healthy credit  utilisation ratio
Credit utilisation ratio is calculated on how much credit is availed from the given credit limit. If your credit card limit is INR 1 Lac and you have utilised INR 40,000, then credit utilisation ratio is 40%.
In case you have multiple credit cards, the total credit limit will be divided by the total credit  availed.
For Eg:

Credit utilisation ratio = total credit utilized (90,000) / total credit limit (3,00,000) i.e30%
Another important factor to be considered is EMI-to-income ratio, calculated as a sum of your credit card and loan repayment values divided by your income. Ideally it should not exceed 40%.
Eg: If you monthly income is INR 80,000 (take home amount, not the gross total income) and your total EMI outflow is INR 20,000 then your EMI-to-income ratio will be 25%
Your credit exposure accounts for 30% of your CIBIL score.

3. Not having a credit history
Not having a credit history surprisingly has a negative impact on your credit score. Since, credit scores are calculated based on credit utilisation ratio and credit behaviour among other factors, not having a credit history makes it difficult for lenders to evaluate whether you fall in the high risk or low risk category.
Credit history accounts for 15% of your CIBIL score.

4. Not maintaining a healthy credit mix
It is advised to maintain a healthy credit mix of secured and unsecured loans.
Secured loans are protected by an asset. The item purchased, such as a home or a car, can be used as collateral.
Unsecured loans include things like credit cards, student loans, or personal loans. There is more risk for the lender in this case, because there is no asset to recover in case of default, thus interest rates are higher for these type of loans.
A higher ratio of unsecured loans is viewed negatively too, hence, it is important to maintain a healthy balance been both.
The type of credit accounts for 10% of your CIBIL score.

5. Making multiple credit inquiries
Owning multiple credit cards can not only become overwhelming but also difficult to manage. Multiple credit inquiries can take a hit on your credit score and portray you as a credit seeker.
Credit inquiries accounts for 10% of your CIBIL score.  

Start working towards improving your CIBIL score by avoiding the above mentioned mistakes and achieve a higher score by keeping the below points in check-

  • Always pay your dues on time
  • Review your credit history regularly
  • Ensure that all old loans are ‘closed’ not ‘settled’ as when an account is settled, it means that the bank has agreed to accept a payoff amount that is less than originally owed. Always get a formal closure certificate from the lender
  • Check your credit report at least quarterly to keep it error free
  • Read your credit report before applying for a loan. Having a low credit score might influence lenders to charge higher interest rates or even result in rejection of the application
  • Apply for new credit in moderation so it does not represent you as a credit seeker
  • Do not use too much credit and control utilisation

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