CIBIL (Credit Information Bureau India Limited) score is a critical factor that lenders use to evaluate your creditworthiness before granting you a loan or credit card.
Having a low CIBIL score makes it difficult to get a credit card. The ideal CIBIL score ranges between 300 and 900, with 750 and above considered excellent.
But what if your score is low?
Read on to explore 10 reasons why your CIBIL score might be lower than you expect, and learn how to increase your chances of getting a credit card with low credit scores in India
What is a Good CIBIL Score?
Credit card and loan approvals depend on CIBIL scores. Good CIBIL scores are over 750. But, various lenders have different criteria for evaluating credit scores, and a decent score may change based on the loan or credit card you're asking for.
Here is a table that gives a general idea of what a good CIBIL score looks like:
10 Common Reasons for a Low CIBIL Score
Here are 10 common reasons individuals might have a low CIBIL score and provide short tips on avoiding or rectifying them.
1. Late or Missed Payments
When you do not make the credit card payment on a loan by the due date or totally miss the payment, this is known as a late payment or a missed payment. This shows a lack of financial responsibility and dependability, which might lower your credit score.
It is important to make payments on time to avoid late penalties and keep a clean credit history. Payments made on time are one of the most important aspects contributing to a high credit score.
2. High Credit Utilisation
A high credit usage ratio means that you are utilising a large portion of your available credit. The percentage is determined by dividing your current credit balance by your total available credit.
A high credit usage ratio indicates over-reliance on credit and potential repayment difficulties. This might lower your credit score since creditors consider you a greater risk. It is suggested that you keep your credit usage ratio below 30%.
3. Applying for Too Many Loans or Credit Cards
Multiple credit applications in a short time are considered excessive. Lenders perform "hard inquiries" on applicants' credit reports when they apply for credit, which can lower their scores.
Numerous hard inquiries in a short time may signal to lenders that you are a high-risk borrower, resulting in rejections and credit score damage. To prevent this, restrict credit applications to when they're needed.
4. Defaulting on a Loan or Credit Card
Defaulting on a loan or credit card means failing to make the required payments on time or not paying. When a borrower defaults, it can have serious consequences, such as late fees, penalties, and interest charges.
If the bankruptcy continues, the lender or creditor may pursue collection activities or even legal action to recover any outstanding debt.
Failure to make timely payments on a loan or credit card balance may have a negative impact on your credit score and make it more challenging to get credit in the future.
5. Errors on Credit Report
Errors on a credit report can have a negative impact on your credit score. This includes misinformation about your personal information, inaccurate bank details, or false transactions.
If you want your credit score to be in good health, you should monitor it often and fix any mistakes you find.
6. Debt Settlement or Write-offs
Debt settlement, often known as debt write-offs, is the practice of negotiating a reduced payment with creditors. Creditors may be willing to declare part or all of an outstanding balance to be permanently uncollectable.
Although this may adversely affect credit, it may be better to declare bankruptcy or not pay at all.
7. Short Credit History
Short credit history refers to a limited credit usage or borrowing history record. Lenders and credit bureaus use credit history to assess creditworthiness, and a short credit history may lead to a low credit score.
Building a good credit history over time is important for obtaining credit and favourable terms.
8. Co-signed Loan or Credit Card
Co-signed loans and credit cards are those in which two or more people apply for the loan or card together, but only one of them ends up being the actual borrower.
The co-signer guarantees payment of the loan or credit card balance in the event that the principal borrower defaults.
Those with a poor credit score may be able to secure a loan or credit card with a co-signer, but there are dangers involved for both parties.
9. Identity Theft or Fraud
Identity theft or fraud is the illegal use of someone else's personal information without their consent for financial gain or other purposes.
This could include stealing social security numbers, credit card information, or other sensitive data. It can cause severe financial damage and harm everybody's credit score. Due to the same, if your credit card is ever stolen, block it on time to avoid damage to your credit score.
10. Foreclosing Your Credit Account
A credit account is foreclosed when the whole outstanding amount on a credit card or loan is paid off all at once, resulting in the account's closure. When completed on time, it might have a beneficial effect on your credit score.
Unfortunately, this action might potentially erase the account's credit history, especially those with a positive repayment history, which can negatively impact your CIBIL score.
Conclusion
You can gradually increase your credit score by making timely repayments that open the doors for better credit opportunities in the future.
Take charge of your financial journey by building and maintaining a healthy credit profile, and watch your financial prospects flourish.
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