Top Reasons for a Low CIBIL Score and How to Fix It

Every lender analyses your CIBIL score, the 3-digit numeric summary of your credit history that ranges between 300 and 900. Loan applicants with a CIBIL score greater than 750 have better chances of securing credit than those with low scores. If you have not handled your credit responsibly in the past, you may have a low CIBIL score. This article outlines the top reasons why you may have a low CIBIL score and how to improve it.

A low CIBIL score may be caused due to the following reasons:

1. Not paying credit card bills on time:
   Delayed or non-payment of EMIs and credit card bills significantly impact your CIBIL score. Even if you cannot repay the entire outstanding credit bill, aim to pay at least the minimum due mentioned on your credit statement. This will help you avoid late payment penalties imposed by lenders.
   
   
2. Not checking your credit report for errors:
   Another reason for having a low credit score may be errors in your credit report. Common errors like incorrect outstanding balance, incorrect loan balance, duplicate accounts, and errors in active loan information can negatively impact your credit score. Therefore, you should regularly monitor your credit report and rectify such inconsistencies by contacting CIBIL.
   
   
3. High credit utilisation ratio:
   Credit utilisation ratio or CRU is the percentage of total credit utilised out of the total credit limit issued across all credit cards. A CRU exceeding 30% negatively impacts your credit score and credit profile by positioning you as a credit-hungry borrower. A high CRU indicates extensive credit dependency and irresponsible credit behaviour.
   
   
4. Not maintaining a healthy credit mix:
   A concentrated credit mix of unsecured loan products like personal loans and credit cards can result in a low CIBIL score. Generally, individuals with a healthy mix of a variety of loan products, including secured (home loan, loan against property) and unsecured loans, enjoy a better credit score. This conveys that you can efficiently manage a variety of credit products and meet your repayment commitments.
   
   
5. Opting for a short repayment tenure:
   While a shorter repayment tenure can help reduce the overall interest burden of your loans, they also result in higher EMI commitments, which may be difficult to meet on a monthly basis. Conversely, a loan with a longer repayment duration allows you to repay the dues without feeling financially overburdened. In other words, longer tenures help you repay the loan without the risk of EMI defaults.
   
   
6. Multiple credit cards
   Possessing multiple credit cards and using them to finance high-value purchases can impact your credit score. Moreover, managing multiple credit card bills and overall CRU becomes difficult, resulting in debt build-up over time. Therefore, you should be judicious about how you use credit cards and refrain from applying for multiple cards.
   
   
7. Submitting multiple enquiries
   Submitting multiple loan and credit card applications simultaneously can also result in a low CIBIL score. Every time you apply for fresh credit, the lender launches a hard enquiry into your credit profile. While multiple hard enquiries reflect poorly on your credit behaviour, rejections significantly lower your CIBIL score.
   
   
8. Joint account debts
   Another reason for a low CIBIL score may be your joint account. Remember that late EMI payments and defaults on a joint account get reflected in the credit reports of all the individuals associated with the account. Therefore, if one person fails to make timely payments, both will suffer in terms of a low CIBIL score.
   
   
9. Guaranteed individual’s default
   If the primary borrower fails to repay the loan EMIs, your credit score as the guarantor can also decline. Similarly, if the guaranteed individual defaults on the loan, your CIBIL score takes a hit and the entire repayment burden falls on you.
   
   
10. Removing records of old debts
    Eliminating records of old debts is a common reason for a low CIBIL score. Your previous debts constitute an essential part of your repayment track record and credit history. Repaid debts place you as a credit-worthy borrower. Therefore, keeping previous debts without defaults is a prudent strategy to ensure a good CIBIL score and faster loan approvals.

• CIBIL scores lower than 650 minimise chances of loan approval, while those above 750 improve chances of acquiring favourable loan terms.
• A low CIBIL score may result from missed payments, high credit utilisation, and multiple hard enquiries.
• Maintaining a healthy credit mix, making timely payments, and monitoring your credit report can help improve your CIBIL score.

Understanding the reasons why you have a low CIBIL score can help you draft and implement a comprehensive credit management strategy to preserve your credit score. Timely payment of EMIs, reducing your CRU, maintaining a healthy credit mix, and regularly monitoring your credit reports are simple and efficient ways of avoiding low CIBIL scores. Remember that a high CIBIL score of 750 and above qualifies you for better loan terms and faster approvals.
 

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