Top 5 Reasons for Low Credit Score

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The CIBIL score is one of the most important factors in obtaining the best credit cards, faster loan approval, and the ability to negotiate interest rates. The higher the CIBIL score, the better the chances of obtaining all of these benefits. It is important to note that an applicant with a low CIBIL score may be approved for a loan/credit card, but he/she will have to pay a higher interest rate for the loan/credit card.

What are the Reasons behind a Low CIBIL Score?

1. Poor Payment Track Record

Your payment history is one of the key factors that affect your CIBIL score. If you have repeatedly delayed or missed your EMI/credit card payments in the past, your score will decrease. Having a default in your credit report WILL also have a big negative impact on your credit score

It should be noted that unpaid dues of a small amount for long can damage your credit score considerably

2. 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 have 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.

3. Missed Bill Payments

We all struggle to keep up with a hectic daily routine. Amidst all the chaos, it’s easy to forget about your telephone or electricity bill unless you are informed of the long-term damage to your credit score. Most credit reporting agencies keep track of your utility payments, and the failure to pay any of your bills is noted on your credit report, impacting your credit score adversely. 

4. Multiple Credit Enquiries

Be careful with your loan applications. The lender pulls out your credit report, also known as a hard inquiry, each time you seek a loan approval. These hard inquiries are reported on your credit file and lower your credit score if multiple inquiries are made in a short timeframe. 
Therefore, you must always avoid applying for numerous debts simultaneously, as it can impact your credit score adversely. Even if you do get approved for multiple debts, it may put additional pressure on your repayment capacity, which will once again reduce your credit score if you fail to make the repayments on time.

5. High Exposure to Unsecured Credit

If you have managed a variety of credit products, like Credit Cards, Home Loans, Personal Loans, prudently in the past, it increases your creditworthiness as it displays your ability to handle different kinds of credit responsibly. 

If you don’t have a healthy mix of credit products, it may lower your CIBIL or Credit Score slightly, but the impact is unlikely to be significant.

How to get a Personal Loan when you have a low CIBIL Score?

  • Show income proof

Lenders want to know that you have regular income coming in every month. Steady income increases the chance of your personal loan getting approved. Although Grace was without a job for six months last year, now she has a steady income for over six months. This works in her favour.

  • File IT returns

If you have filed your taxes for the last three years, lenders will look at it positively. Even if your income falls in a particular financial year, like it happened with Grace, make sure you continue to file your IT returns as it will serve as proof for future loan applications.

  • Provide employment proof

Grace should get a letter from her employer that shows her employment history. If lenders see that Grace has been gainfully employed for an extended period, they are more likely to approve her loan.

  • Have a decent bank balance

Grace can’t have a bank balance that is close to zero. This won’t inspire confidence in the lenders. Lenders need to see that she is not living beyond her means and doesn’t have an extravagant lifestyle.

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