Non-payments or delayed payments can negatively affect your credit history and bring down your credit score immediately. These activities are indicative of the fact that either you are not serious about repaying your current debt or you are not capable of repaying them. Consequently, your credit score will go down. Thus, your repayment history plays a major role in developing a good credit score. Read on to understand how paying all your debts timely is good for your credit worthiness.
CIBIL Score Limit- The Credit Information Bureau (India) Ltd. is the credit rating agency that provides CIBIL reports and scores. Data on CIBIL tells us that around 90% of all approved loan applications have required a CIBIL score more than 700. Also, as banks and other financial institutions move toward credit-risk based calculations for interest rates, having a high CIBIL score puts you in a strong position when requesting new credit. Banks will give you friendly interest rates on credit when you have a good CIBIL score.
When you apply for any loan and submit the filled application for a loan to a bank, your bank is bound to check is your credit score and credit history. If you have a bad credit history and your credit score is low, your bank will directly reject your loan application. With a good credit figure, you will certainly move towards further formalities of loan approval. Given that your credit or CIBIL score is the first and one of the major deciding factors to help you get your loan application processed, it is very important to understand the factors that affect your credit score and take steps accordingly to improve it if it is below expectations. Most of us think if we don’t pay our credit card bill on time, our credit score gets severely affected. But it is surely not the only factor that affects your credit score. There are several other factors that we need to pay attention to in order to maintain a good credit history and credit score.
Note that with the ascendency of credit bureaus in the financial world, even one missed payment matters and can lower your CIBIL score.
This means that- a. Financial institutions might reject your loan application. b. Reduce the spending limit on your credit card. c. Or you might just overpay on your existing loans.
The 2 factors that are crucial on the impact of your missed payments are:
A. How recently you missed payment – In case just a few payments were delayed in the past, it will temporarily affect the score.
B. Severity of missed payments - But if it is beyond that and if it is a missed payment in the last six months, then you have the lenders frowning.
However, it is important to understand the difference between defaults.
A. Minor -Any payments that are delayed or missed less than 90 days are considered minor defaults. Since lenders feel that such a default could be cleared, your CIBIL score gets only a temporary hit due to a less than 90-day late payments period.
B. Major- If you delay a payment beyond 90 days, your account becomes an NPA and this is usually a big red flag for the lenders. The other derogatory remarks such as defaults or settlements also hurt your creditworthiness and your ability to take a loan in the future.
The Affect
In case you are a minor default, you can actually catch up with the payment and your CIBIL score will eventually bounce, though not to its original score, but somewhere close.
The credit score will not improve as long as you’re missing your payments continue to reflect. Missed payments in past is one of the biggest reasons why new loan applications get rejected. Some credit card companies frequently monitor the borrower’s credit behaviour and bring down the credit line if they see that your credit score is not healthy. The intention behind such a practice is lenders take a call on whether or not they want to do business with you basis the credit risk they take. If they see that you are up to date on your payments, you are more likely to get better deals and higher credit limits. So try not to miss your payments ever. If you do, catch up with it as quickly as possible.
It is a good idea to monitor one’s credit history regularly so that you don’t receive rejections from financial institutes and banks.
There are several measures for a healthy credit report
It is always prudent to have a combination of: Secured loans: Home loan, auto loan etc. & Unsecured loans: Personal loan, Credit cards etc.
A low utilization of credit helps in improving your CIBIL score greatly. This includes joint accounts considering that you are liable for missed payments.
If you are closing a credit card account, make sure you get a no objection certificate (NOC) from a credit card provider. A credit card will be closed only upon a NOC from the bank. Remember that the CIBIL database is updated every 45 days. So, don’t forget to check.
Remember that while it takes years to build a strong credit record, it only takes a few instances or lapses, intentional or otherwise, to damage your credit history. Note that credit checks are now an important feature of the Indian finance ecosystem. Therefore, diligence is required for a healthy CIBIL status.
What is defined as a late payment?
For instance, borrower Rahul has a credit card, with payment date set at the 15th of every month. If Rahul makes a payment any day post due date, the payment is a late payment. For ease of category, banks denote late payments into buckets of 30, 60, 90 and 120 days PDD (Past Due Date).
What are the steps to eliminate late payments from my CIBIL report?
*Purely at the discretion of the lender.
Can I increase my credit card limit frequently?
Enhancing the limit on your credit card may give you the flexibility of getting more credit, however, this is likely to affect your credit score negatively.
Banks access the net worth of individuals before giving credit. This means that a frequent rise in the limit of your credit card shows that you depend on credit for basic finances. This is a red flag for the bank.
What is the difference between a loan being 'closed' and it being 'settled'
If a default is reflected on your credit report, you must immediately settle it and ensure that 'closed' status is reflected. This means you have to get a formal closure certificate.
