Reasons for a Low CIBIL Score

Most lenders and credit card issuers analyse your CIBIL report when assessing your credit application. A low CIBIL score may lead to reduced chances of approvals and may result in the outright denial of your loan or credit card application.

CIBIL score ranges between 300-900, wherein a credit score above 750 shall help enhance the chances of loan or credit card approval. However, if your CIBIL score is 650 or less, the chances of your loan approval are very less.

If you have not handled your credit responsibly in the past, there is a high chance that your credit score will be low which means you have low creditworthiness. In such cases, lenders and credit card providers would consider it very risky to approve your credit application.

Most preferred lenders or credit card issuers would want their applicants to have a high credit score to approve their credit application. However, one can first improve the low credit score and then apply for a credit product when necessary.

When you know the reasons for having a low CIBIL score, you can follow some best practices to improve it. Read on to learn measures to rebuild and improve your CIBIL score.

Top 5 Reasons for Low CIBIL Score

If you have a low CIBIL score, there are chances that you might have, knowingly or unknowingly, followed some of the below-mentioned practices. To avoid any further dip in your credit score, check out these reasons and avoid using them while utilizing your existing or new credit.

1. Delayed/Non-payment of Loan EMIs or Credit Card Dues

• Your payment history is one of the key factors that affect your CIBIL score. If you have repeatedly delayed or missed your EMI/credit card payments in the past, your score will decrease significantly
• If your credit report displays DPD (Days Past Due) with numbers, it means you have defaulted on payments that shall lead to a fall in your credit score
• Unpaid dues of small amounts for longer duration lowers your CIBIL score drastically

Suggested Read: How Credit Cards Impact Your Credit Score

2. Simultaneously Applying for New Credit Applications

• Submitting multiple applications for new loans and credit cards with several lenders within a short period results in an increase in the number of hard enquiries that negatively impact your credit score
•  All of these hard enquiries get recorded on your CIBIL report and depict your credit-hungry behaviour which is potentially at a higher risk of default. As a result, your CIBIL score starts falling
• Outright rejection of your loan or credit card credit application also decreases your CIBIL score significantly

3. Not checking your CIBIL Report for Errors

• Errors in your CIBIL report, such as incorrect personal or account details, duplicate accounts, incorrect loan balance, errors in outstanding balance, errors in reported active loans/credit, etc. may adversely affect your CIBIL score
• There may be errors made by a bank or NBFC or a case of fraudulent usage such as identity theft
• Ideally, you should regularly check your credit report and raise a CIBIL dispute to rectify errors, if any, at the earliest.

4. High Credit Utilization Ratio (CUR)

• Credit Utilization Ratio (CUR) is the percentage of the total credit utilised to the total available credit limit across all credit cards.
• To avail of lending benefits and for quick loan approvals, it is ideal to maintain a CUR of 30% or less.
• If you have managed to pay all the loan EMIs and credit card dues in time, your CIBIL score may not be affected even with high CUR.
• Still, try maintaining your CUR as low as possible to further improve the chances of loan approval

5. Credit Mix

• If you have managed a variety of credit products, like credit cards, home loans, personal loans, etc. prudently in the past, it displays your ability to handle different kinds of credit responsibly
• If you don’t have a healthy mix of credit products (unsecured or secured loans), may lower your CIBIL Score slightly, but the impact is unlikely to be significant
• A good mix of credit products in your credit report may help increase your credit score.

Tips to Improve Your CIBIL Score

Follow the simple tips given below to improve your CIBIL score:

Pay Credit Card Dues and Loan EMIs on Time

• Paying your EMIs and credit card dues in full and on time has a positive impact on your CIBIL score as it indicates responsible credit behaviour.
• Just keep doing this over time and you will be able to improve your score and also maintain a high score

Check your Credit Report for Errors

• Monitor your credit report frequently for administrative errors and possible fraudulent usage.
• These errors, if reported using the CIBIL dispute resolution mechanism and rectified promptly, can help improve your CIBIL score instantly

Do Not Apply for New Credit in Short Duration

• Avoid applying for new credit unless you need it.
• Keeping the number of new applications in check will prevent multiple hard enquiries from appearing on your report and help you maintain a high score

Settle Your Debts at the Earliest

• Avoid settling your debts and instead try and pay off outstanding debts in full.
• Consider settlement only as a last resort if you cannot close your credit account.
• This is because, even though a settlement will reduce your debt burden, it indicates an inability to handle your finances judiciously which will negatively impact your CIBIL score

Do not Overspend on Sanctioned Credit Limit

• Credit utilization ratio indicates the extent of your dependence on credit.
• It is recommended to maintain a low credit utilization ratio (usually 30% or lower of your total available credit limit).
• It hints at a lower dependence on credit and thus, a lower burden of repayments.
• This indicates responsible credit behaviour and has a positive impact on your CIBIL score.
• Bureaus rarely penalise you for having a high CUR once in a while.

FAQs

Q. What is the difference between credit score and CIBIL score?

Ans. A credit score is a broad term for the 3-digit numeric summary found in your credit report and may be generated by any of the four credit bureaus or Credit Information Companies in India – TransUnion CIBIL, Experian, Equifax or CRIF Highmark.

However, the CIBIL score is a type of credit score that is specifically calculated and generated by India’s leading credit bureau, TransUnion CIBIL, as per the consumer credit information provided by banks, NBFCs and other financial institutions every month.

Q. Is my CIBIL score the only determinant of my ability to secure new credit?

Ans. Your CIBIL score is one of the first things that lenders check and consider while lending you money.

However, it is not the only factor that determines your ability to secure new credit, as the other components include your account details, repayment history, and information related to past or existing loans, debts, paid-off dues, DPD (Days Past Due), collateral/security, etc.

Q. If I have a low CIBIL score, will my credit score generated by any other credit bureau also below?

Ans. There may be a slight variation in the CIBIL score because each Credit Information Company (CIC) has its proprietary algorithm and the weightage given to each factor involved in calculating the credit score varies.

Q. What is the difference between hard and soft enquiries? Can soft enquiries hurt my CIBIL score?

Ans. Enquiries made by lenders when you apply for a new loan or credit card are known as hard enquiries.

Soft enquiries refer to credit report checks made by individuals to review or monitor their credit behaviour.

Soft enquiries have no impact on the credit score no matter how frequently such soft enquiries are completed.

On the other hand, too many hard enquiries can decrease your CIBIL score as they may indicate your hunger for credit.

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