28-Feb-2018 written by : FSI-Team
Like all other figures in financial world your credit score is also one. Just like you would not want any other financial figure, your income, your account balance, share price that you hold, NAV of mutual fund invested by you, a depleting credit score can also be stressful.
While drop in any other financial number will have an impact on your wealth, even the value of the car that you drive or any other asset that you own, the drop in your credit score will have a negative impact in your ability to grow and or rebuild that wealth. A low CIBIL score as we all know can lead to a much higher rate of interest being charged and even getting the rejection on the loan requests.
Let us now look at the drop that your credit score can experience within a span of one month. But before that, let us understand the reasons that can lead to drop.
Nonpayment: Since the credibility depicted by bureaus in numerical term is about the chances of default, the non-payment of loan EMIs or credit card dues can lead to a severe drop.
Closing an old account: Length of history contributes significantly to the scores and if you are closing an old account the score may drop.
High credit exposure: The overall credit exposure is high then it would have a detrimental impact on the credibility one builds on bureau over time.
New trade line: Any new trade line since would increase the credit exposure will have an impact thought this could be short lived.
Window shopping: While looking for a loan if one applies with various banks then it would have a detrimental impact. Every time one applies the bank run an enquiry on the bureau and multiple enquiries in short period are deemed to be harmful by lenders.
The credit score is quite dynamic and changes are quite frequent. Depending upon which ones of the above happen within a month's period the credit score will get impacted. A single or multiple above mentioned occurrences and the combination in which they happen will determine the drop. While an exact drop in scores may not be possible to ascertain, but the following are some examples that will enlighten you as a reader.
Ravi Kumar was looking out for a small ticket loan and was offered one at a high interest rate. He decided to check out with multiple lenders. He applied for a loan with 8 lending institutions and guess what, he got rejected by all. Multiple applications at the same time can be construed as desperation for credit and or some malicious intent. In both the cases, the banks would be wary of extending loan.
Satish Narayan was going through financial constraints. Apart from struggling in repayment of his loans' outstanding his outstanding on credit cards was inching closer to the credit limit. He decided to pick up a loan so that he is able to manage his finances till the constraints were overcome. However, despite having the eligibility his loan got declined. This was on account of him showing clear signs of financial stress on the bureau report. Delay by a few days on payment of his payments and maxing out on the credit limits are taken as a clear indication of stress on the financial front.
Zubin Shah had multiple loans and credit cards and since was finding it difficult to manage all of them with different payment cycles, decided to close a few of them. The mistake that he did was he closed the two cards that were issued to him in the beginning of his career since he found their features not to be so exciting and the credit limit to be low. He ideally should have kept the oldest card since it would have continued to positively impact his length of credit.
One has to be careful while dealing with the loans since any wrong move can jeopardize the credit profile and leave one looking for ways and means to improve CIBIL score. Pay on time, be careful in applying for loans and do not expose yourself to high credit. These three steps will help and not let your score drop in a short span of time.