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Probable reasons you have a low CIBIL score

Credit Information Bureau of India Limited or CIBIL was formed in the year 2000 as a Credit Information Company (CIC). Now known as TransUnion CIBIL, this credit bureau collects and maintains the records of loans and credit card payments for individuals as well as businesses.

The information regarding loans and credit card payments are provided by the member banks and other categories of lenders on a regular basis. CIBIL uses complex statistical formulas to arrive at the credit score which is known as the CIBIL score.

Your CIBIL score is a 3-digit number which determines your creditworthiness as far as lenders are concerned. This score ranges between 300 and 900 and a score above 750 is considered a good score.

The disadvantages of having a low CIBIL score is that your loan or credit card application may be outright rejected, you might have to wait longer than usual, there will be more paperwork involved, and you might end up paying a much higher rate of interest as well. In some instances, your application might be considered, if the lender chooses to do so.

If your loan is disapproved, you will not be able to upgrade your standard of living. Your dreams for a home, car, children's education will remain unfulfilled.

Reasons for Low CIBIL Score

When you are not regular with your loan repayments or credit card payments, you are likely to have a low CIBIL score. Banks and other non-banking financial institutions provide information about your credit history to CIBIL. If you have a poor credit history, your CIBIL score will also be low. This will lead to lenders rejecting your loan or credit card applications. It is important to understand the reasons for a low CIBIL score and take remedial actions as soon as possible.

Payment history

One of the factors that result in a low CIBIL score is your payment history. Delays in payment in case of a loan or paying the minimum amount in case of a credit card bill will result in the lowering of your CIBIL score. If you default on your EMIs or delay in making payments, it amounts to bad credit and your CIBIL score falls. If you default even once, it will probably impact your CIBIL score. If you are a regular defaulter, it will certainly affect your CIBIL score adversely.

Multiple credit enquiries

When you have applied for multiple loans at the same time or there are multiple credit card requisitions at one time, it will have a negative impact on your CIBIL score. As far as a lender is concerned, this kind of financial behaviour is a matter of serious concern. When you make multiple applications for loans or credit cards, it is a clear indication that your debt burden will go up substantially. An extremely high debt burden means your capacity to repay your loans or dues has been severely weakened or will become weaker in future.

Exhausting the credit limit regularly If you exhaust your credit limit by spending money on a regular basis, it will lead to a constant heavy debt burden for you. If the application for your loan is accepted, then it would negatively affect your repayment capacity. In such cases, you are placed in the lower bracket by CIBIL to warn prospective lenders of your high credit utilisation.

Managing credit types

It is important to strike the right balance between secured loans and unsecured loans. If you have an uneven balance between secured and unsecured loans, it is likely to impact your credit score. In case of secured loans, you pledge your asset like your property or your car as collateral to the lender. The collateral is a secured debt for the lender who is providing the loan. So in case you default on your payment, the lender would seize your asset provided as collateral and recover the outstanding loan amount.

As the name suggests, unsecured loans are not secured by any collateral, but are based on your creditworthiness. These are also referred to as personal loans or signature loans.

Auto loans and home loans come under the secured loans category, whereas personal loans and credit cards come under the unsecured loans category.

Having only unsecured loans in your financial profile negatively impacts your CIBIL score as you have high debts. Also, if your financial profile has only unsecured loans, then credit bureaus like CIBIL come to the conclusion that you are not in a position to provide any collateral. So, in order to improve your CIBIL score, it is important to have a healthy combination of both, secured and unsecured loans in your loan profile so that there is a clear message about your assets and financial independence.

Your financial payment records cannot be changed by CIBIL since the information is provided by banks and financial institutions. CIBIL score 2.0 is the revised version of the previous 'CIBIL credit score' and contains the current trends in credit data and consumer profiles. This score is not available for individual consumers yet.

When you have a CIBIL score which is denoted by 'NA' or 'NH', it means that the consumer does not have an adequate credit history, has add-on credit cards or has had no credit activity recently.

Some lenders are reluctant to provide loans to you if you have no credit history.

How to Improve Bad CIBIL Score

You don't need to be disheartened if you have a low CIBIL score. There are certain important things you need to keep in mind which will lead to a high CIBIL score or improved CIBIL score. You can improve your credit score through the following ways: Ensure you don't exhaust your credit limit

Credit cards provided by lenders have a predefined credit limit which is the maximum amount that you can spend at a particular time. You should try not to breach the maximum limit on a regular basis. This shows that you cannot manage your debt well leading to a low CIBIL score. CIBIL forms the same impression about you if you simultaneously apply for too many credit cards.

Avoid late payments

Ensure that you pay your dues or a minimum amount on time to the lender. Your credit history and hence your CIBIL score are adversely affected as a result of defaulting regularly.

Monitor owned and co-owned accounts on a regular basis

You need to ensure that not only do you make timely payments, but holders of accounts co-signed, guaranteed or jointly held with you also are regular in their payments. You might miss payments due to reasons like relocation, non-receipt of credit card statements or disputes with the lender. Keeping a tab on all this would improve your credit history.

Maintaining healthy credit

Your loan profile should contain the right mix of secured and unsecured loans as this will lead to a good credit history as well as a CIBIL score.

FAQs

Why is my CIBIL score important for loan sanctioning?

Your CIBIL score is important for getting your loan sanctioned as that is what forms the first impression for the lender. Your loan would be rejected if you have a low CIBIL score.

What is a CIBIL score and what factors affect my CIBIL score?

A CIBIL score is a 3-digit score between 300 and 900 which is based on your credit history. You can find this in the 'Accounts' and 'Enquiries' section of your CIBIL report. A score close to 900 is considered good.

How can I improve my CIBIL score?

You can improve your CIBIL score by regularly paying your dues, not exhausting your credit card limit regularly, having the right balance between secured and unsecured loans, not applying frequently for fresh credit, keeping an eye on your co-signatories, joint account holders payment status, and regularly reviewing your payment history.

Can CIBIL delete or change my records?

CIBIL is authorised only to collect records of individuals which the members provide. They cannot delete or change records.

What does it mean if my score is 'NA' or 'NH'?

An 'NA' or 'NH' score does not mean anything negative. It merely says that you don't have a sufficient credit history to be allotted a CIBIL score.