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Reason Why Your Credit Score May Fall And How You Can Prevent It Credit score is one of the primary factors that your lender assesses while considering your loan application

By Anirban Roy

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CIBIL score, also known as credit score, is provided by the Credit Information Bureau (India) Ltd (CIBIL). There are other agencies also which provide credit scores.

CIBIL's three-digit score defines an individual's creditworthiness. CIBIL score range is between 300 and 900. The credit score provides an idea of whether you will be able to pay back the loan amount with interest on time.

It is mandatory to fulfil the lenders' eligibility criteria to get a loan sanctioned. Other than general criteria such as age, annual income and employment-related requirements, the credit score is a prerequisite you should check before applying for a loan. It is one of the primary factors that your lender assesses while considering your loan application.

Reasons Due To Which Your Credit Score May Fall

Here are some reasons why your score may fall below the desired CIBIL score range.

Frequent loan applications: Frequently applying for loans can bring your credit score down. When a person applies for a new loan, lenders often pull a hard report on credit scores. New credit report inquiries make up 10 per cent of the credit score. A hard enquiry can lower the credit score temporarily. This will usually return to normal after regular EMI repayments.

It is best to avoid applying for multiple loans to reduce the number of hard enquiries on one's credit report.

Credit utilisation ratio: Your credit score range may fall way below the desired range if you have a high credit utilisation ratio. Credit card transactions are taken into consideration in this scenario. It is best to use approximately 30-50 per cent of the credit limit available on the card.

If a large percentage of that total credit is in use every month, it indicates that this customer depends on credit to pay their bills. Even if balances are paid on time, if you have made large purchases, it will impact your credit score negatively.

Irregular EMI payments: If you miss or delay an EMI payment for a month, it will cause a decline of your credit score. Missing even a single EMI payment hurts the score.

Your payment history and financial behaviour over a period of time are the two significant factors that determine your credit score. So, making late payments or missing out on making any 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 an extended history is necessary for a higher credit score. Closing a credit card 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 open lines of credit: Scoring models factor the age of open credit lines into the calculation. The credit agencies consider a person maintaining a credit account for a longer time more reliable.

If a customer closes a credit card or a lender cancels one, it will shorten the active history, and as a result, the CIBIL score declines. If you open a new account, it will lower the average of your accounts. This, too, will not help in improving the scores.

Changes in the credit score formula: Determination of a customer's credit is a complex business. Agencies try to fine-tune their formulas to make them a better indicator of a person's credit risk. Different agencies use older and newer versions at any time. When a new, slightly changed credit score formula is used, it will impact a person's credit score.

Pointers How You Can Prevent Your CIBIL Score From Falling

Here are a few pointers to prevent the decline of your CIBIL score.

  • Make timely payments of your credit card bills which will help you keep a good credit score and avoid late payment charges on the bill.
  • Pay your credit card dues in full and not in instalments to prevent interest from being added to your bill and raise your credit score.
  • Keep the credit utilisation ratio below 30 per cent to get the score moving up.
  • Avoid debt settlement with your lender at any cost to maintain good credit health.
  • Always maintain a fairly high gap between your loan applications to ensure 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 on time to prevent your score from going down.
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