Many borrowers do not realise how everyday credit habits influence their CIBIL score. There are several factors other than the repayment of credit card bills that will affect a borrower's credit score. In this blog, we will discuss the key factors that affect your credit score and tips to improve it.
Top 8 Factors That Affect Your Credit Score Negatively
Explore the major factors related to your credit account that can affect your credit score. Also, explore the smart tips for achieving an excellent credit score:
1. Negligent Payment Behaviour
Your repayment history plays a key role in shaping your CIBIL score, making up 35% of the FICO score. Missing EMIs can negatively impact your score and signal poor financial discipline to lenders.
To stay on track, it's wise to set up payment reminders or automate your payments. Consistently paying the EMIs on time helps build a strong credit profile and better credit health.
2. Exceeding the Credit limit
As a borrower, you should follow the ideal credit utilisation ratio, which is 30% of the credit limit. Exceeding your credit limit may signal to lenders that you are a high-risk borrower.
For example, if your credit card limit is Rs. 2 Lakh, you should try not to spend more than Rs. 60,000. Exceeding your credit limit may negatively affect your credit score.
3. Unpaid Dues
A credit report provides a detailed summary of your entire credit history. It includes your credit repayment records, outstanding balances, overdue payments, and any defaults. Even small unpaid dues on loans or credit card payments can hurt your CIBIL score.
Therefore, timely repayment of debts is vital for a good credit history. Keeping your accounts in good standing reflects your disciplined financial behaviour and helps maintain a healthy credit score.
4. Paying Only the Minimum Amount Due
Paying only the minimum due on your credit card can hurt your credit score. It does not clear your outstanding balance, so the remaining amount continues to attract high interest. Over time, this can lead to a debt trap and strain your monthly budget. To improve CIBIL score, pay off as much of your outstanding debt as possible based on your monthly income.
5. Making Multiple Credit Applications
Whenever you apply for a new credit or loan, lenders run a hard inquiry. Multiple applications reflect on your CIBIL report or credit report. These multiple hard inquiries negatively affect your CIBIL score. This indicates to credit institutions that you are overly dependent on credit to fulfil your financial needs. As a borrower, you should never apply for multiple credit options within a short time.
6. Errors in your CIBIL Report
A CIBIL report is a detailed record of your credit history that includes all your past and current credit accounts. Errors in your credit report may adversely affect your CIBIL score and future borrowing or credit opportunities. In case you notice any mistakes in the report, you should act quickly and raise a dispute with the respective credit bureau.
7. Not Having a Credit Mix
A limited credit mix can negatively affect your CIBIL score. Using only one type of credit limit affects your overall credit profile. Lenders then have fewer data points to assess your repayment behaviour. This reduces your credit strength in the eyes of financial institutions.
A balanced mix of secured and unsecured loans, such as auto loan and Personal Loan, respectively, shows responsible management of different credit types. Without this diversity, your score may improve more slowly, and lenders may view you as a higher-risk borrower.
8. Credit History
The more time you've spent using credit, the better you get at managing it. This is why a more extended credit history can help raise your credit score. Your credit score considers the age of your oldest and newest credit accounts, as well as the average age of all your credit accounts.
Closing your old credit or loan accounts may affect your credit history and result in a lower CIBIL score. So, avoid doing so unless it is essential.
Also Read: Top 10 Unknown Facts about CIBIL Score
To Conclude
Along with an excellent CIBIL score, it is essential to have good financial habits from an early stage of life. These habits lay a foundation for a good credit profile and to fulfil your financial goals. While you work on improving your CIBIL score, you should also review and plan your credit requirements with financial institutions from time to time.
Take the next step by checking your free CIBIL score with Poonawalla Fincorp and make informed decisions for an excellent CIBIL credit report.
FAQs
How does a CIBIL score impact loan approvals?
A higher CIBIL score increases your chances of loan approval and helps you secure better interest rates. A lower score may lead to rejection or higher interest rates.
What happens if I exceed my credit limit?
Exceeding your allotted limit increases your credit utilization ratio. This can lower your CIBIL score and signal to lenders that you may be a risky borrower.
How long does it take to improve a poor credit score?
It can take several months to a few years, depending on your debt repayment consistency and financial behavior.
Does obtaining too many credit cards affect my CIBIL score?
You can take up multiple cards if you manage them well; however, high balances or missed payments can negatively affect your score.
How long do missed payments stay on a credit report?
Missed payments can stay on your report for up to 7 years and may affect future loan applications.
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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