02-May-2019 written by : FSI-Team
Unlike our bank statements credit score is not something we check regularly. We check it only when we need to apply for a loan or worse still we come to know about it being low when our loan application is rejected. The loan application rejection may come as a surprise but at that juncture you may be left with little choice but to look for an alternative lender or wait for your score to increase so that you can get the loan sanctioned. However in case you have not waited till the crucial moment to check your credit score and you realize that it is falling, then what can you do to deal with the situation.
Credit rating is not calculated based on only one aspect or your credit history of last few months; it’s a reflection of a combination of factors since the time of your first credit transaction. So, there could be one or a combination of various factors than can cause the score to dip. So here is a list of probable factors that can result in a low CIBIL Score.
Missed payments: Repayment history is the biggest contributor to the final score. So missed payments not only are a financial burden as they result in fines and interest charges but they also cause the score to dip.
High credit utilization: This is the second most important aspect when it comes to the score calculation. Using more than 30% of the sanctioned credit limit per card or the overall limit of all cards put together can result in the score going down.
Settling a loan or unpaid card dues: If you have unpaid dues on a card or for a loan and you decide to settle with the creditors then it is going to bring down your score. So if you have unpaid dues on your credit report it is better to close them and not get them reported as “settled”
Higher proportion of unsecured loans: Credit mix is also a factor in credit score calculation. So if you have higher proportion of unsecured credit in the form of personal loans or credit card bills then that could be bad news for your credit score.
Too many hard enquiries: Applying for too many loans or cards simultaneously or within a small span of time can also cause the credit score to fall.
It is recommended that one check their score regularly; this is now become easier as you can get a free credit report once a year from any credit rating agency. So if you see that your score is on the decline here is a list of things you can do to improve it:
Pay on time always: As we said above repayment history is the biggest contributor to your credit score so paying on time without fails goes a long way in making your score healthy. In case you are facing a liquidity crunch you should talk to the lenders to figure out a suitable loan restructuring plan.
Check your report carefully: Sometimes you score could be falling not because of what you have done but due to some erroneous reporting by a lender or an error at the time of data entry at the rating agency’s level. Ensure that no such errors are there in the report.
Pay pending dues: An unpaid due can continue to be an eyesore in the report and can adversely impact the rating. So it’s best to clear them but make sure that they are reported as paid and not settled.
Focus on your credit utilization ratio: Even if you do pay the dues on time a high utilization ratio can cause the score to be low so you need to make sure your overall spending and per card spending is less than 30% of the sanctioned limit. This can be done by getting a bigger credit limit, controlling the spending and also spreading the Credit card usage optimally across cards.
Refrain from applying for new credit: Though it’s unlikely that someone will apply for credit unless they really need it but its best to avoid applying for any credit when the score is already falling. A low score not only reduces your chance of getting fresh credit but a hard enquiry will reduce it further. Wait for the score to improve before applying for a loan or look for alternative options of credit.
Seeing results of your efforts to improve the score might take a while so patience and perseverance is required. Keep being a responsible borrower and the score will improve with time.