Understanding and maintaining a good CIBIL Score is very important for your financial future. It affects your ability to borrow money for big purchases, like a home or a car, and even for smaller needs. Sometimes, without realising it, people make mistakes that can cause their score to drop quickly. This guide will help you understand what a CIBIL Score is and the common errors that can harm it, so you can avoid them.
Understanding Your CIBIL Score
Before we look at what can make your score fall, let’s understand what it is and why it matters to you.
What is a CIBIL Score?
Your CIBIL Score is a special three-digit number that acts like a report card for how well you manage borrowed money. It ranges from 300 to 900. A higher score means you are seen as a more responsible borrower. This score is calculated by credit bureaus, like CIBIL, based on information about your loans and credit cards.
Why Your CIBIL Score Matters to You
This score is very important because banks and other lenders use it to decide if they should lend you money. A good CIBIL Score can make it easier for you to get loans or credit cards when you need them. It can also help you get better interest rates, which means you pay less money back in total. It shows lenders that you are reliable and can be trusted with money.
Key Reasons Your CIBIL Score Drops
Many actions can lead to a sudden drop in your CIBIL Score. It’s helpful to know what these are so you can avoid them.
Missing Your Loan Payments
This is one of the quickest ways to harm your CIBIL Score. Even being a few days late with your loan instalments or credit card bills can be reported to credit bureaus. When you completely fail to pay back a loan, which is called defaulting, it has a severe and long-lasting negative effect. This can make it very difficult to borrow money in the future.
Using Too Much of Your Available Credit
This refers to how much credit you use compared to the total amount of credit you have available. For example, if you have a credit card with a limit of £1,000 and you use £700, your credit utilisation is 70%. Financial experts suggest keeping this percentage below 30%. Using too much of your available credit can make lenders think you are struggling financially and might not be able to repay new debts.
Applying for Too Many Loans or Credit Cards
Each time you apply for new credit, such as a loan or a credit card, a “hard enquiry” is made on your credit report. While one enquiry might not significantly affect your score, many enquiries in a short period can be a red flag for lenders. They might think you are desperate for credit or trying to take on too much debt, which can lead to a drop in your score.
Closing Old Credit Accounts
It might seem sensible to close old credit accounts you no longer use, but this can actually reduce your score. Your CIBIL Score benefits from a long history of responsible credit use. Closing an old account shortens the average age of your credit history and also reduces your total available credit. This can then make your credit utilisation ratio appear higher, which is not good for your score.
Becoming a Guarantor for a Loan
When you become a guarantor for someone else’s loan, you promise to pay back that loan if the main borrower cannot. This significant responsibility appears on your credit report. If the person you guaranteed the loan for misses payments or defaults, it will directly and negatively affect your CIBIL Score, just as if it were your own loan. Always understand the risks before agreeing to be a guarantor.
Settling Loans for Less Than You Owe
Sometimes, if you are struggling to repay a loan, a lender might agree to a ‘settlement’ where you pay a smaller amount than the total you originally owed. While this helps clear the debt, it is recorded on your credit report as ‘settled’ or ‘partially paid’, not ‘fully paid’. This can be seen negatively by future lenders, as it indicates you could not meet your original financial commitments.
Errors on Your Credit Report
Mistakes on your credit report, such as incorrect late payments, loans you never took out, or wrong personal information, can unfairly lower your score. It is important to regularly check your credit report from recognised credit bureaus. If you find any errors, you must report them immediately to the credit bureau so they can investigate and correct them, protecting your score.
How to Protect Your CIBIL Score
Protecting your CIBIL Score is simpler than you might think and involves good financial habits.
Paying Your Bills on Time, Every Time
This is the most important step you can take. Always ensure your loan instalments and credit card payments are made by their due dates. Setting up automatic payments or reminders can be very helpful to avoid accidental late payments.
Managing Your Credit Wisely
Keep your credit utilisation low, ideally below 30% of your total available credit. Avoid applying for new credit unless it is absolutely necessary. Also, try to keep your older, well-managed credit accounts open, as they contribute positively to your credit history.
Regularly Checking Your Credit Report
Make it a habit to review your credit report at least once a year. This allows you to spot any errors quickly and understand your financial standing. You can usually get one free report annually from credit bureaus, which is a great way to stay informed.
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