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Understanding the concept of late payment on CIBIL Score

CIBIL score is a 3-digit dynamic number allotted to individuals and businesses by TransUnion CIBIL (Credit Rating and Information Bureau of India Ltd), which is regulated by RBI (Reserve Bank of India). Banks and financial institutions check this score to analyse the prospects of being repaid by loan and credit card applicants. It is evaluated through complex statistical calculations basis parameters like credit history, timeliness of debt repayments, number of existing loans, frequency of loan applications and defaults, among others. Each of these factors play an integral role in determining the CIBIL score. Hence, inability to meet the stipulated due date adversely affects the score.

What is late payment?

Banks and financial institutions set a due date by which loans and credit card payments have to be made. Non-payment or delayed payment of loans and credit card bills within the due date gets recorded in CIBIL as late payment. The score falls with every late payment, but takes considerably longer to improve even after a consistent record of timely repayments.

Late payments reflect negatively on the creditworthiness of individuals and businesses, and become an impediment for loan approvals in the future. Loan approvals to an individual with a low CIBIL score is interpreted as being a risky proposition by lenders, while a good credit score provides them with some assurance of getting back the debt amount.

How Late Payment Affects Your CIBIL Score

Late payment of debts on loans and credit cards reduces your CIBIL scores, which in turns, adversely affects your prospects of securing a loan or credit card in the future. Banks and financial institutions interpret low CIBIL scores in the following ways:

  • Interpretations of low CIBIL score caused due to late repayment:CIBIL scores are measured between a scale of 300 and 900, with 300 being the least and 900 being the highest. The minimum CIBIL score required for loan approvals is 750. A score of at least 750 enables individuals to be eligible for loans from a wide range of lenders, and ensures a quick and hassle-free loan approval, after which the loan amount is disbursed into the expected account within a short period of time. In contrast, a score between the range of 600 and 749, reduces the scope of securing a loan. In such cases, lenders may consider other factors like monthly income, stability of employment, number of current loans, to evaluate the applicant’s prospects of paying debts on time. A lower score between 300 and 599 further reduces the chances of getting a loan approval. With such scores, a lender may approve a loan against collaterals like gold, FD, shares and assets. However, the loan approval is often accompanied with stringent terms and conditions, a comparatively lower loan amount and high interest rate.

  • Question the probability of debt repayment : A history of timely repayments leads to a good CIBIL score, which in turn assures prospective lenders about your creditworthiness and improves the possibility of loan approval. On the other hand, late payments impact the score negatively, making lenders sceptical of retrieving the debt.

  • Offer very high rate of interest and lower loan amount : Payments within the pre-determined date reflect positively on the CIBIL score. A high score ensures that you can negotiate on the rate of interest and loan amount, and strike a better deal for yourself. A good score also enhances your chances of loan eligibility from a greater number of lenders, giving you the opportunity to negotiate with all of them and settle with the one who is ready to offer you a loan at the lowest interest and high loan amount. A CIBIL report, which reflects a low score caused because of late payments, will not only hamper your chances of negotiating on the interest rate and loan amount, but you may even have to settle with a loan against a higher rate of interest and low loan amount.

  • Difficulty to improve a low CIBIL score : When defaults are reported by banks and financial institutions to CIBIL, it is considered to be a ‘status quo’ till banks and financial institutions notify otherwise. However, it takes individuals to maintain a sustained effort of timely repayments over a long period of time to observe an improvement in their CIBIL score.

  • High delayed payment charges : Non-payment or delayed payment of loans attracts high penalty rates or steep late payment charges. Not paying the entire outstanding amount against credit card or paying just the minimum amount is also considered to be late payment of the remaining amount. Banks usually charge a high rate of interest on the remaining amount pending against your credit card.

  • Affects your reputation : Despite you holding a good record of timely debt repayments in the past, one default may affect all the reputation that you have gathered till date, making it a challenge for you to secure a loan or credit card in the future.

Steps to Avoid Late Payment

If you are a credit card holder or borrower of any type of loan, then you must regard the due date of making repayment/instalment as the absolute deadline.

  • Keep your details updated: Register your contact details like contact number, email ID and residential address with your bank or financial institution, so that you can be reminded about making the repayments well in advance. Credit card statements and loan instalment notices are sent by post to your registered address, emailed to you, and/or notified through a message on your contact number. Credit card statements and loan instalment notices mention the due date and payment amount, ensuring that you repay the accurate amount within the due date.

  • Opt for ECS (Automated Clearance Service) or Auto-debit facility : You may give a standing instruction to your credit card-issuing bank or loan lender to auto-debit, that is, automatically debit the outstanding amount or minimum amount on a certain date every month. This saves you from the hassle of remembering to pay your debts on time.

  • Pay your cheque 2 to 3 working days before the due date by cheques or Bill pay : If you prefer making your repayments through cheque or third-party payments like Bill Pay, make sure that you do it at least 2 to 3 days before the due date. This is because these take time to get cleared.

  • Convert outstanding amount to EMIs : When you are unable to clear the entire outstanding amount at one go, it is advisable that you convert it to EMIs, as opposed to paying just the minimum amount. However, once you opt for this EMI option, ensure that you repay the instalments every month.

  • Spread your credit usage over many cards : If you hold more than one credit card, it is recommended that you spread your expenses across all the cards. This has a dual benefit. Firstly, it will help you in maintaining the ideal credit utilisation ratio, which is 30% to 40% of the total credit limit, across all your cards rather than spending beyond this ratio on one card. Secondly, it will prevent you from keeping a credit card unused, which affects your CIBIL score.

  • Borrow from friends but pay in time : If you know you will be unable to clear the entire outstanding amount on time, it is best to borrow from relatives or friends rather than not meeting the due date or making a partial payment.

FAQs on Impact of Late Payment on CIBIL

What are the factors that affect CIBIL score?

The following are some of the most common factors that affect CIBIL scores:

  • Avoid using a credit card with low balance. It is recommended that you repay the entire outstanding dues before transacting with it to prevent your CIBIL score from reducing further.

  • Pay the entire amount pending against your credit card within the due date rather than paying only the minimum amount due. When the balance amount that is carried ahead to the next month, not only does it attract a heavy interest rate as a late payment charge, but it also affects your score.

  • Make your loan repayments within the pre-determined date to enhance your CIBIL Score.

  • Opt for auto-debit of the outstanding amount against your name by giving standing instructions to your bank to prevent yourself from missing out on the due date. This date can be decided according to your convenience, so that you can ensure that you have the necessary balance in your account on the pre-decided date. Otherwise, banks charge a heavy penalty on an unsuccessful auto-debit.

  • Avoid habits that are a proof of bad credit behaviour like withdrawing cash against your credit card. This alerts banks and financial institutions about your financial stress, preventing them from taking the risk of approving a loan. Not just that, it affects your CIBIL score.

  • Check CIBIL score and report for incorrect information, omission or repetitions of transactions. These inaccuracies may be the reason behind your low score, which can lead to a loan rejection, thus, bringing down your score further.

  • Stay away from being a loan guarantor. If your borrower defaults on payments, it will impact your score too. Besides, the bank or financial institution might ask you to repay the debt on your guarantor’s behalf, the inability of which will adversely affect your credit score yet again.

What is credit mix?

A mixture of secured and unsecured loans is referred to as a credit mix. Secured loans are home loans, car loans, etc., while unsecured loans refer to credit card. Having a record of secured loans only in your CIBIL report affects your CIBIL score, and vice versa. Therefore, a healthy mix of both is recommended for a positive credit history.

What should my CIBIL score be to get a loan?

CIBI scores are evaluated on a scale between 300 and 900, with 900 being the highest score and 300 being the lowest. The minimum score required for being eligible for a hassle-free loan and credit card is 750.

My CIBIL score is 630. Am I eligible for a loan?

Here’s how lenders interpret your loan or credit card eligibility based on CIBIL score:

750 – 900: The minimum score required for being eligible for a loan is 750. With a score above 750, an individual usually secures a quick and hassle-free loan approval. As a wide range of lenders show their interest in offering a loan to high scorers due to their healthy credit history, he/she can negotiate on the loan amount and rate of interest and settle for the best offer.

600 – 749: Such middling scores reduce the chances of loan approval. Under such circumstances, lenders may consider other factors like monthly income, employment stability and number of existing loans to evaluate the probability of receiving the debt repayments to evaluate loan eligibility.

300 – 599: A score below 600 reflects the poor credit history of borrowers. As a result, the probability of loan rejections is high. Besides, despite loan approvals, the interest rate offered on them is high. With such scores, lenders may opt for a loan against collateral like gold loan, fixed deposits, shares and assets.