Credit score is a very important parameter that reflects your credit worthiness. A person with good credit score is welcome to avail further financial services from any financial organization like Banks and NBFCs. But there are several reasons that cause a bad Credit score and thus reduce your chances of getting any financial product like Loans, Credit Cards etc. We got queries from people asking why my credit score is still low even if I am paying my credit card bills and EMI on time now.
There are several reasons why your credit score is falling down and most common reasons are unpaid loan EMIs and Credit Card Bills. Apart from these two there are other reasons that might reduce your credit score and you probably don’t even know that its happening with you. Here are those common reasons that you should know:
Reason 1 – Not checking credit score before apply for financial product
It is one of the very common reasons that people overlook and it leads to Loan or credit card application rejection. Many people don’t understand the importance of Credit Score and therefore don’t bother to check their credit score before submitting their application.
A credit score higher than 750 is highly attractive to the lenders and it increases the chances of your application being accepted. With Cibil score, you can have a fair idea about your application prospects.
If your credit score is not good enough then it is suggested to wait for few months and take your time in improving your credit score before you apply for a loan or credit card. A rejected application not only fails to provide you the desired service but also negatively affect your credit score and therefore it’s not worth taking the risk.
Now the question is, should you check your credit report even if you are not looking for a loan or credit card? The answer is YES. There might be some errors that can cause damages on your credit score so keeping an eye on your credit score will keep it free from errors.
Reason 2 – Check your payment history
When you get your credit report, make sure that you scan through it thoroughly. Payment history is the first thing from which you should start checking the details. It hits as big as 35% of your credit score so you can understand that it is a big deal altogether.
People usually think that a few delayed payments don’t hurt the credit score but it’s wrong. Late Payments of credit card bills, unpaid loan EMIs, loan defaults etc are common reasons that lead to a sinking credit score.
If you are aware that you have a poor credit score then you cannot take such risk as it can drag you deeper in more problems. You cannot fix your credit score overnight; it takes months to fix a poor credit score using hard work and serious cost cutting.
Reason 3: Credit Utilization Ratio
Credit utilization ratio is another factor that impacts a person’s credit score. It has a big impact of 30% on your credit score but most people just neglect it and then later face real trouble.
For those who don’t know, Credit Utilization Ratio is the reflection of your credit card usage with respect to the availability spending limit. For example: If your credit card limit is Rs. 1 lac and you spend 50,000 per month then your CUR will be 50%. This ratio is used to assess your credit managing capacity and habit.
In general a card holder must keep their CUR as low as possible as having a high CUR indicates that the card holder is in cash crunch consistently or a compulsive spender. Also it also indicates that there is a higher chance that you can face defaults on your payments. So Banknomics suggest every card holder to control your spending via credit card and keep it in normal limit.
A credit card should be used in a situation where other options are not available i.e. in emergencies. It’s quite common to use the credit card carelessly and fall into credit card debt trap due to failing the repayment on time. It is also advised that card holders should not pay the minimum amount due but to pay the entire debt if possible.
Reason 4: Age of Credit Line
Age of credit means the average age of all your currently open loan and credit card accounts. The longer credit history people have, the better it looks as it signifies as the person is a responsible borrower. There is a 15% impact of credit lines on your credit score.
If you are using credit wisely by taking it on time and repaying your debts for a longer period of time with timely payments, it would be helping in improving your credit score. It is suggested to use old credit cards to pay your utility bills as it is giving you a good credit line history and on time payments will be a positive impact on it.
Check out the Infographics: why Your Credit Score Isn’t Improving
Reason 5: Total Accounts
The total number of your open and closed credit cards, loan account also affects your credit score. It has a 10% impact on your credit score but even this 10% impact can be crucial in case you have a low cibil score. Here you can take the benefits by ensuring that you have both unsecured and secured credit lines and you are using them in correct way.
A person with secured loans like Home Loan or car Loan is more likely to have a positive score as compared to those with unsecured loans. Unsecured loans are higher in cost and if you are taking more number of unsecured loans then it will more likely reduce your credit score.
Tip: If you have multiple unsecured loans, repay them on high priority. It will work in favor of your credit score.
Reason 6: Credit Enquiries
The count of all the hard enquiries that banks initiate when accessing your profile has an impact your credit score. Make a note that you just do a soft inquiry that does not change your credit score. People apply for several loans and credit cards thinking that more credit value means better lifestyle. This behavior indicates that the person’s debt burden has increased and they are possibly less capable of honouring any additional debt. Keep in mind that hard enquiries have a 10% impact on your credit score.
Reason 7: Negative Status Accounts
Account with the status marked as Written off, suit filed, settled, account sold etc are called negative accounts. The higher the number of negative status accounts in your credit report, the more you credit score reduces. If you don’t have a negative account, it’s a good sign for a healthy credit score.
Negative account has low impact you credit score but even a small negative remark can also cause problem with your credit report and be the reason of rejection of any loan or credit card application.
It is always suggested that an individual should be aware of their credit score and keep an eye on it in order to maintain it. Do not do any financial activity that may hamper your credit score negatively.