Advisory: Personal Loan Mistakes That Affect Your CIBIL Score

When availing a Personal Loan, there are several mistakes you could unknowingly make that can affect your CIBIL score. For example, applying with too many lenders, and ignoring your CIBIL report and not paying EMIs on time can adversely impact your CIBIL score. This could lead to loan rejections and unfavourable damage to your credit score, affecting your future borrowing capacity. Read more to know more about these Personal Loan mistakes and learn about how you can avoid them.

Key Personal Loan Mistakes That Drag Down Your CIBIL Score

Certain common mistakes can seriously impact your CIBIL score. Here are some fundamental mistakes to avoid.

Missing EMI or Delayed EMI Payment

The worst Personal Loan mistake you can make is to miss or delay your Personal Loan Equated Monthly Instalments (EMIs). Credit bureaus take into account delayed payments; any significant delay beyond the due date can affect your CIBIL score negatively. Depending on your CIBIL score, even a single delay can lower your score by 50 to 100 points.

Plus, a ‘default’ status can remain on your credit report for up to 7 years from the date of the last missed payment. As a result, all borrowers will see you as high-risk, effectively ruining your financial future.

Also Read: How to Get a Personal Loan for a CIBIL Score of 550

Making Multiple Loan Applications in a Short Time

During an emergency, it may seem wise to apply to all banks or NBFCs for an approval. But this is a big blunder. A hard enquiry is performed on your CIBIL report every time you apply for a loan. Making multiple hard enquiries within a short span of time is termed ‘credit hungriness’ as mentioned by Bhavesh Jain, MD & CEO of TransUnion CIBIL. This can signify financial desperation and the build-up of balances within a short duration, reflecting badly on your credit profile.

In addition, the enquiries temporarily lower your CIBIL score; though temporary, the dip is certain to be substantial, further reducing your approval chances. It can even result in outright rejection of your application by the lenders, fearing that you are taking on more debt than you will manage.

Maintaining a Healthy Debt-to-Income Ratio

For Personal Loan approval, lenders often focus on the Debt-to-Income (DTI) ratio of the applicant. DTI essentially represents the proportion of your monthly income that is used to pay any existing EMIs and debt obligations. A lower ratio means you can handle new loans more easily, while a higher ratio shows you may be under financial stress.

Most lenders in India would consider anything below 36-40% as a good DTI; anything above 40% increases rejection chances and limits your chances of acquiring new credit, indirectly lowering your credit score. To stay on the safer side, ensure that your debts are not eating much into your income and that your earnings can easily take care of EMI repayment.

Also Read: How to Get a 900 Credit Score – Tips to Improve CIBIL

Not Checking Your Credit Report

You should check your credit report regularly, especially before applying for a Personal Loan, because errors are more common than most people realise. Your report may include inaccurately reported late payments, closed accounts still being shown as active, or fraudulent activities carried out by a third party in your name.

These cases can harm your score. If you don’t check your report regularly to flag and correct such issues, you miss the chance to fix them. Naturally, it can cost you when a worthy loan is turned down.

Settling a Loan

Settling a loan may seem like a relief when you are struggling financially, but it can have long-term consequences on your credit profile. When you choose a settlement, the lender accepts a partial repayment and marks the account as “settled” instead of “closed.” This status stays on your credit report for up to seven years and signals to future lenders that you were unable to repay in full.

As a result, your chances of getting fresh credit are greatly reduced. Unless you have no other option, you should always prioritise restructuring or negotiating new terms with the lender over settlement.

Cosigning Irresponsibly

Cosigning a Personal Loan for someone else is a big financial responsibility that many borrowers underestimate. The moment you agree to cosign, the entire loan reflects on your credit report as if it is your own. This additional debt makes it harder for you to apply for and get approval on your own loan applications.

In addition, if the primary borrower delays or defaults on payments, your credit score will drop just as theirs would. Lenders will hold you equally liable for repayment, which could strain your own finances. This means that even if you never use the money, you carry the risk. You should only cosign if you have complete trust in the borrower’s repayment capacity and are financially prepared to take over the debt if needed.

Managing Debt to Avoid CIBIL Score Mistakes

• Timely Repayments: Develop a habit of paying your EMIs and credit card bills on time; create a financial plan and put payments on autopay.
• Debt Consolidation: Take out a Personal Loan as a means of debt consolidation, provided it offers a lower rate of interest and other better terms.
• Reduce Credit Utilisation: Focus on paying off balances to lower your credit utilisation ratio.
• Consistent Good Behaviour: Maintaining good financial habits over time will gradually rebuild your CIBIL score if it’s low and help to manage debt long-term.

Also Read: How to Improve Your Credit Score by Online Personal Loan?

To Conclude

A high CIBIL score always show that you are financially responsible and improves your chances of securing loans with better terms and conditions. However, any of these mistakes can cost you dearly by impacting your score and your creditworthiness. Keep these pointers in mind when availing a Personal Loan, and enjoy a stress-free tenure while you meet your financial needs.

Explore Personal Loan options from Poonawalla Fincorp that offer favourable conditions and competitive interest rates.

Frequently Asked Questions

Is a low CIBIL score a reason no bank in India will ever give you a loan?

A low CIBIL score may prevent you from getting loans at favourable terms, but specialised NBFCs or lenders may still offer you a loan, albeit with higher interest rates and stricter conditions to compensate for the increased risk.

What happens if CIBIL score is low?

If your CIBIL score is low, your loan applications may be offered with smaller loan amounts, higher rates, and less flexible terms, or possibly even rejected. It can also impede your ability to acquire other forms of credit like credit cards.

What is the most common reason for a low CIBIL score?

The most common reason for a low CIBIL score is poor repayment behaviour. Regularly and constantly missing out on repayments of loan EMIs and credit card payments can be the hardest on your score.

How long does it take to improve a CIBIL score?

Improving your CIBIL score can take from six months to a few years, depending on the situation. Maintaining payments for any current obligations while reducing credit utilisation should help raise your score. In addition, avoid making unnecessary credit applications.

Does checking my own CIBIL score bring it down?

No, checking your CIBIL score does not bring it down. It is termed as a ‘soft enquiry’ and has no relevance to one's credit score. On the other hand, a lender’s check equals a ‘hard enquiry’ which temporarily brings the score down.

Does settling a loan affect my CIBIL score?

Yes, settling a loan has a negative impact on the CIBIL score. A ‘settled’ status shows that the full payment was not made and can raise a red flag with lenders in the future. It drops your score, and the status remains on your credit report for seven years.

How does taking a new Personal Loan affect CIBIL score?

Whenever a new Personal Loan has been taken, due to a hard enquiry, your credit score holds a slight chance of falling. However, with initiation of EMIs, punctual payments will increase your credit score.