Your CIBIL score may be low despite making consistent on-time payments due to associated factors such as a high credit utilisation ratio, errors in your credit report, or a short credit history. Your payment history is only one crucial factor determining your credit score. However, even if you are punctual with your repayments, neglecting the other factors can influence your score and prevent it from increasing. In this blog, we'll understand why your credit score can be stuck at one level or decrease, even when you pay your EMIs on time. Read on to learn more!
5 Hidden Factors Affecting Your Credit Score
Here are five of the main hidden factors that adversely affect your credit score:
1. Overdue Credit Card Payments or Loan EMIs
Even one delayed payment can cause your credit score to fall if it is reported to the credit bureaus. Sometimes people think that a slight delay will not make a difference. However, lenders and credit card issuers report all late payments or delayed EMIs, and this can negatively affect your credit score.
Hence, you should set up auto-pay or reminders so that your loan EMIs and credit card dues are never late. Your payment history is the strongest component of a good credit score.
2. Using More than 30% of Your Credit Limit
Your credit utilisation ratio is a key factor that can determine your credit score. This is the percentage of the total available credit limit you use. Suppose your credit card limit is ₹1,00,000 and you spend an average of ₹80,000 per month. Your credit utilisation ratio is 80%.
If your credit utilisation ratio increased in the month over 30%, it will affect your credit score. A high credit utilisation ratio shows credit bureaus like TransUnion CIBIL that you are overly dependent on credit.
Even when you pay your dues on time, a high credit utilisation ratio can cause a decrease in your credit score. Experts recommend that you keep your credit utilisation ratio low, especially if you have high credit card balances, to increase your CIBIL score. Hence, try to use less credit or increase the limit to keep your ratio even.
3. Too Many Loan or Credit Applications in a Short Period of Time
If you apply for several loans or credit cards in a short period of time, your credit score will decrease. Each time you apply for a new credit card or Personal Loan, lenders do a hard inquiry on your credit record. Too many hard inquiries can reduce your credit score, even after you make payments on time.
4. Closing Old Credit Card Accounts
While closing old credit accounts may make general sense if you're not using them anymore, in reality, this can end up damaging your score. Your credit history plays a major role in your CIBIL score. The longer history you have, the better it is for your credit score, as it shows that you've managed credit well for a long period of time.
Closing old accounts leaves you with a reduced total credit history, which can lead to a lower credit score. If you have any old credit card accounts, then it is best to keep them active and keep using them. They can be beneficial for having a longer credit history and a good credit score.
5. Not Having a Balanced Credit Mix
Your credit mix is the diversity of credit products in your portfolio. Ideally, you should have a balanced mix of secured and unsecured loans. Having only one kind of credit account, for example, credit cards or secured loans, won't contribute much to your credit profile.
Borrowers who can manage both EMI-based loans (such as auto loans or personal loans) and revolving credit (such as credit cards) often get better loan offers from lenders. Maintaining a good mix of credits will benefit you in the long run to improve your CIBIL score.
ALSO READ :- What is DPD in CIBIL Report? Full Form & Impact
How to Improve Your Credit Score?
A recent credit score drop can be due to a number of reasons. Here are a few simple steps you can follow to boost your CIBIL score and your creditworthiness in the long term:
1. Keep Your Credit Utilisation Below 30%
Use less than 30% of your total credit limit and pay your bills on time. A lower credit utilisation ratio shows that you're not overly dependent on credit, which helps your credit score improve.
2. Always Pay EMIs on Time
Ensure all your loan EMIs and credit card bills are paid on or before the due date. Even one missed payment or late payment can negatively affect your score. Set reminders or enable auto-pay to avoid forgetting.
3. Keep Monitoring Your CIBIL Report
It is always a good practice to check your CIBIL report at regular intervals for any mistakes or wrong information, as defects or errors can harm your credit score. Report any discrepancy to TransUnion CIBIL immediately.
4. Keep Your Older Credit Accounts Active
Do not close your older credit cards unless necessary. The longer the credit history, the better your score and overall financial health. Checking your CIBIL score yourself is considered a soft inquiry, and it doesn't impact your credit score.
5. Don't Apply for Too Many Loans in a Short Period of Time
Don't apply for more than one loan in a month, as every loan application leads to a hard inquiry and reduces your credit score. Try to keep a gap between loan applications, and request credit only when you absolutely need new credit.
6. Have a Balanced Credit Mix
Maintain a good credit mix, with a balance of revolving credit, like credit cards, and secured credit, like a Personal Loan or car loan. Having a good mix indicates you are able to manage various credit products properly and reflects good personal finance.
7. Pay All Outstanding Dues
Settle any outstanding credit or unpaid bills immediately. Even a small amount of dues or service fees can lead to a low CIBIL score if reported as late payments or if there is incorrect information.
ALSO READ :- How to Get Your CIBIL Commercial Report Online - Step by Step
To Conclude
Your credit score depends on a lot of different factors, like payment history, credit utilisation, credit account age, credit mix, and even loan inquiries. So, the next time you think about why my CIBIL score decreased without any reason, remember that even if you are making timely payments for all your credit card and loan accounts, your score will likely decrease if you don't pay attention to the other factors.
As a best practice, regularly check CIBIL score for free with Poonawalla Fincorp and don't apply for too many loans or open multiple credit cards in a very short period of time, as it will reduce your score.
Frequently Asked Questions
Will my CIBIL score drop even if I pay my credit card dues on time?
Yes, if your credit utilisation ratio is high and you've applied for too many loans/credit cards within a short time, then your CIBIL score will most likely go down.
Will checking my own CIBIL score bring it down?
No, checking your own CIBIL score won't reduce it, as it is considered a soft inquiry. You should check your CIBIL score and detailed report regularly.
How frequently should I check for errors in my CIBIL report?
You must check at least once every 3 to 6 months so that you can identify wrong or outdated information beforehand.
Will setting a higher credit limit actually help my CIBIL score?
Yes, getting a higher credit limit will reduce your credit utilisation ratio, which can positively impact your score if you refrain from exceeding the limit.
Why did my score go down after settling a loan fully?
Sometimes, settling a loan reduces your credit mix or shortens your credit history, resulting in a slight drop.
Can having no loans or credit cards affect my CIBIL score?
Yes, if there is no credit history available, CIBIL cannot estimate your payment behaviour, leading to a low or "no score" status.
How soon will my score bounce back from an unexpected dip?
If you keep your credit usage low and make regular payments, your CIBIL score will start to improve within 3 to 6 months.
Will a joint account or a co-signed loan impact my score?
Yes, if the co-borrower is late or defaults, it will also show up on your credit report and can reduce your CIBIL score.
Could my lender not have reported my payment yet?
Yes, banks occasionally report late to credit bureaus, so it can seem like your score is decreasing for a brief period of time.
Will small outstanding charges or inactive old accounts hurt my score?
Yes, even tiny unpaid balances or missed accounts can be reported as missed payments and lower your score.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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