Reasons for Low CIBIL Score

Most lenders and card issuers analyse your CIBIL score at the time of loan or credit card application submission. Low CIBIL score may result in loan application denial or dim chances of approval with high interest rates and annual fees. CIBIL score ranges between 300-900, wherein a credit score above 750 shall help in getting your credit card or loan application approved. However, if your CIBIL score is 650 or less, it is less likely that your new credit application shall get approved. 

If you have not handled your credit responsibly in the past, there are high chances that your credit score would be low which means you have low creditworthiness and in turn, most preferred lenders or credit card issuers would not approve your credit application. However, if you know the reasons for having a low CIBIL score, you can follow some best practices to improve it.

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Read on to know these measures to rebuild and improve your CIBIL score.

Top 5 Reasons for your 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 while utilizing your existing or new credit. 

1) Delayed/Non-payment of Credit 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 drastically
• If your credit report displays DPD (Days Past Due) with numbers that means you have defaulted on payments that shall lead to 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 Multiple Credit Applications

• Submitting multiple applications for new loans and credit cards with several lenders within a short time results in an increase in the number of hard enquiries that eventually leads to decreased credit score
•  All of these hard enquiries get recorded on your CIBIL report and depicts your credit hungry behaviour which is potentially at a higher risk of default. As a result, your CIBIL score is likely to diminish
• Simple rejection of your credit application (loan or credit card) also decreases your CIBIL score significantly

3) Prevailing Errors in your CIBIL Report

• Errors in your CIBIL report, such as an incorrect personal or account details, duplicate accounts, incorrect loan balance, error in outstanding balance, errors in reported active loans/credit, etc. may adversely affect your CIBIL score.
• These may be errors made by a Bank or NBFCs 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) Maintaining 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 products. To avail lending benefits and for quick loan approvals, you should maintain a CUR of 30% of less. Like you have a monthly credit limit of Rs. 1,00,000, then your monthly utilization should be of not more than Rs. 30,000.
• A high credit utilization ratio (90-100%) or frequently maxing out credit cards indicate a higher dependence on credit and a potentially high repayment burden that eventually shall lead to loan or credit application denial by most of the lenders. With a regular high credit utilization ratio, you  are considered to be at high risk of defaulting which shall further lower your CIBIL score

5) Improper Credit Mix

• If you have managed a variety of credit products, like Credit Cards, Home Loans, Personal Loans, prudently in the past, it increases your creditworthiness as 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.
• Availing more of secured loans rather than unsecured may help in building your credit score gradually

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 in a timely manner, can help improve your CIBIL score
• Do not apply for new credit in short duration: Avoid applying for new credit unless you actually need it. Keeping the number of new applications in check will prevent multiple hard enquiries 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. 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 spend too much 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.

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FAQs

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

Ans. 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 Information Companies in India – TransUnion CIBIL, Experian, Equifax or CRIF Highmark. CIBIL score is specifically calculated and generated by the India’s leading credit bureau, TransUnion CIBIL, as per the consumer information provided by the banks and financial institutions on monthly basis.

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 be low?

Ans. There may be a slight variation in the CIBIL score because each Credit Information Company (CIC) has its own 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 own 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 a higher dependence on credit and a higher burden of repayments in the future.

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