Reasons for a Low CIBIL Score

Your CIBIL score plays a crucial role in determining your ability to secure loans or credit cards. A low score indicates potential issues with your financial habits or history, making it vital to understand what might be dragging your score down. By identifying and addressing these factors, you can work towards improving your financial health.

Here are common reasons for a low CIBIL score and how they affect your creditworthiness:

Delayed or Missed Payments

When you delay or miss payments on credit card bills or EMIs, it signals to lenders that you may not be reliable with repayments. Payment history is a major factor in determining your CIBIL score, and even a single missed payment can impact it significantly. Delayed payments also attract penalties and additional interest, further burdening your finances. To avoid this, set reminders or enable auto-debit facilities to ensure on-time payments consistently.

High Credit Utilisation Ratio

Your credit utilisation ratio measures how much of your available credit limit you use. A high ratio—typically over 30%—indicates that you are heavily reliant on credit, which can be perceived as financial instability by lenders. For example, if your credit limit is ₹1 Lakh, spending ₹80,000 regularly suggests over-dependence, which lowers your score. 

To keep a healthy credit utilisation ratio, try to increase your credit limit. You can also use multiple credit cards, but make sure your total spending stays below 30% of your combined credit limit.

Multiple Loan or Credit Card Applications

Frequent applications within a short time frame can lower your score and make you appear desperate for credit. This behaviour may signal financial stress to lenders. To mitigate this, research the eligibility criteria for a credit product before applying and avoid submitting multiple applications simultaneously.

Defaulting on Loans

Defaulting on loans, whether due to financial strain or negligence, has a severe impact on your CIBIL score. Defaults indicate a breach of trust with the lender, which significantly reduces your creditworthiness. Such behaviour stays on your credit report for years, making it harder to secure future loans. If you're struggling to repay, consider restructuring the loan terms with your lender to avoid defaults.

Lack of Credit History

Credit bureaus rely on historical data to evaluate your repayment behaviour. If you haven’t used credit products like loans or credit cards, there’s no data to build a substantial score. To establish a credit history, start with small credit products like a secured credit card or personal loan for a manageable amount, and ensure timely repayments.

Errors in Credit Report

Errors such as unrecognised accounts, incorrect payment statuses, or outdated information can negatively affect your credit score. These errors may occur due to data mismatches or reporting issues by lenders. For instance, an account marked as unpaid despite full settlement can lower your score unnecessarily. Reviewing your credit report regularly and disputing inaccuracies with the concerned credit bureaus enables you to rectify such issues promptly.

Settling or Closing Accounts Without Full Payment

When you settle a loan or credit card debt for less than the full outstanding amount, the lender reports it as a ‘settled account’. This indicates to future lenders that you didn’t repay the entire loan, which harms your creditworthiness. Similarly, closing credit accounts with unpaid dues can also negatively impact your score. Instead of settling, strive to pay the full amount, even if it takes longer, to maintain a positive credit history.

Follow these effective tips to improve your CIBIL score:

Pay Bills on Time

Making timely payments is one of the most crucial factors in maintaining a strong credit score. Always ensure that you pay your loan EMIs and credit card bills by their due date to build a positive credit history. Consider setting up reminders through mobile apps, calendar alerts, or SMS notifications to keep track of payment deadlines. Enabling auto-debit for recurring bills can also help you avoid missed payments. If you’re unable to pay the full balance on a credit card, make sure to pay at least the minimum due amount to avoid late fees and damage to your credit score.

Maintain a Low Credit Utilisation Ratio

Your credit utilisation ratio reflects how much credit you’re using compared to your total credit limit. To maintain a healthy ratio, keep your spending below 30% of your credit limit. For example, if your total credit limit is about ₹1 Lakh, try to use less than ₹30,000. If you find yourself exceeding this threshold often, request your bank to increase your credit limit. Alternatively, use multiple credit cards to distribute your expenses, but avoid overspending. Keeping your utilisation low shows lenders that you are financially disciplined.

Review Your Credit Report Regularly

Monitoring your credit report is essential to ensure it accurately reflects your financial behaviour. You can access a free credit report once a year from credit bureaus like TransUnion CIBIL, CRIF High Mark, Equifax, or Experian. Check for errors such as unrecorded payments, incorrect personal details, or accounts that you don’t recognise. If you spot inaccuracies, raise a dispute with the credit bureau immediately and provide the required documentation to correct them. Regularly reviewing your credit report also allows you to track your progress and identify areas for improvement.

Avoid Frequent Credit Applications

Applying for multiple loans or credit cards within a short period can hurt your credit score due to the hard inquiries made by lenders. Plan your credit applications wisely and only apply when it’s absolutely necessary. Check the eligibility criteria set by your chosen lender before applying to ensure approval and avoid unnecessary hard inquiries. 

Clear Outstanding Debts

Outstanding debts can significantly impact your credit score if left unpaid for too long. Prioritise clearing overdue amounts, starting with high-interest loans or credit cards. Create a repayment plan that allows you to settle debts systematically while managing other expenses. Clearing outstanding debts not only improves your credit score but also reduces financial stress in the long run.

Diversify Your Credit Portfolio

A diverse credit portfolio, including both secured loans (like a loan against property) and unsecured loans (like personal loans or credit cards), shows lenders that you can manage different types of credit responsibly. Avoid relying solely on one type of credit, as a balanced mix improves your creditworthiness. However, ensure you only take on loans you can repay comfortably to avoid financial strain.

Avoid Closing Old Credit Accounts

Typically, older credit accounts help maintain a longer credit history, which positively affects your credit score. Even if you no longer use an old credit card, keeping the account open can be beneficial. Closing accounts reduces your overall credit limit and shortens your credit history, which can lower your score. Instead, keep old accounts active with occasional small transactions and ensure they are paid off on time.

Use Secured Credit Cards

If you have faced defaults in the past and need to rebuild your credit score, consider using a secured credit card. These cards are issued against a fixed deposit, making them low-risk for the issuer. Use the card for regular expenses and pay the full amount on time every month. Responsible use of a secured credit card can help you rebuild your credit profile gradually and effectively.

Avoid Becoming a Co-Signor

Co-signing a loan or becoming a guarantor for someone else’s loan can impact your credit score if the primary borrower fails to make timely payments. As a co-signer, you are equally responsible for the repayment, and any defaults will reflect on your credit report. Avoid co-signing unless you are confident in the borrower’s repayment ability. Protect your credit score by ensuring you take on financial liabilities that are within your control.

A low CIBIL score can be a hurdle in your financial journey, but it’s not irreversible. Understanding the reasons behind a low score and adopting healthy credit practices can steadily boost your credit profile. Timely payments, maintaining a balanced credit utilisation ratio, and regularly monitoring your credit report are essential steps toward improving your score. Financial discipline and a proactive approach can help you improve your score and get access to better credit opportunities in the future.