Understanding the Reasons Behind a Credit Score Drop

The CIBIL score is a three-digit number that lenders check to assess your repayment capacity, creditworthiness, and ability to repay a loan on time. Having a high CIBIL score, ideally above 750, can increase your chances of securing a loan at favourable terms.

Reasons Why Your Credit Score is Decreasing 

A drop in your CIBIL score can happen due to various factors, but understanding these reasons can help you take corrective action and improve your credit health. Here are some common causes:

1. Delayed Payments

Timely payments are crucial for maintaining a strong credit score. Missing due dates or delaying payments can impact your credit history, as it indicates inconsistency in managing your financial obligations. Regularly monitor your accounts to ensure all payments are made on time.

2. Higher Credit Utilisation

If you have recently increased your credit limit or are using a significant portion of your available credit, it might affect your score. Keeping your credit utilisation ratio below 30% demonstrates disciplined financial management and helps maintain a stable credit score.

3. Lack of a Balanced Credit Mix

An imbalanced credit portfolio can affect your score. A healthy mix of secured and unsecured loans, along with short- and long-term credit, showcases diverse and responsible credit behaviour, which positively influences your score.

4. Errors in Your Credit Report

Sometimes, incorrect information from lenders or financial institutions can lead to errors in your credit report, resulting in a sudden drop in your score. Regularly reviewing your CIBIL report ensures any inaccuracies are identified and corrected promptly, protecting your credit profile.

5. Frequent Loan Applications

Applying for multiple loans within a short period can indicate financial instability and make you appear credit-hungry. Each application also results in a hard inquiry, which can temporarily lower your score. It is advisable to apply for loans judiciously and only when necessary.

Also Read: Understanding Different CIBIL Score Ranges and Their Impact

What is a Credit Report?

Your credit score comprises four major factors with each assigned a different weightage. This includes:

Payment History

One’s payment history is the biggest contributing factor to the credit score. It records all your credit payments such as loan EMIs and credit card bills. If you regularly clear your outstanding bills and instalments by the due time, it will boost your score while delayed or missed payments could lower it.

Credit Exposure

Credit exposure or the credit utilisation ratio also constitutes a part of your credit score. Credit utilisation denotes your credit usage in proportion to the available credit limit, and a ratio of over 30% can project you as a high-risk borrower and may cause a dip in your credit rating.

Credit Type and Duration

Another part of the CIBIL score comprises the duration of your credit history and the type of credit portfolio you hold. A longer credit history with a good repayment record is always preferable since it implies sufficient experience in managing credit.

Other Factors

Hard inquiries and other similar aspects also cover some parts of your credit score. When you apply for a loan, lenders access your credit report from the credit bureau, commonly referred to as a hard inquiry. Several of these can damage your score.

Also Read: Know What CIBIL Score Is Considered Good for a Home Loan

Does Checking CIBIL Score Affect It? 

No, checking your own CIBIL score does not change your credit score. When you check your CIBIL score for your own knowledge, it is called a ‘soft enquiry’ and does not change your score. But when a lender checks your CIBIL score at the time of evaluating your loan application, it is considered a ‘hard enquiry’ and can reduce your score.  

What is a Hard Enquiry?

When a lender or financial institution checks your CIBIL report as part of evaluating your loan application, it is registered as a ‘hard enquiry’. Hard enquiries show up in the ‘Enquiries’ section of your CIBIL report. These enquiries indicate you are seeking new credit, and multiple applications in a short period may reduce your score. 

What is a Soft Enquiry? 

A soft enquiry is a credit check that happens even though you aren't actively looking for a new loan or credit card. When you check your own CIBIL score, for example, it is considered a soft enquiry. This also includes some background checks that aren't part of a formal credit application. 

How Often Should You Check Your CIBIL Score?

Checking your CIBIL score on a regular basis will help you understand how your financial activities affect your score. When you review your score periodically, you can quickly identify any unexpected changes, such as a sudden drop due to a missed payment, a reporting error, or an unauthorised enquiry. This allows you to take corrective action before it affects your chances of loan approval. 

Benefits of a Good Credit Score  

Without a credit score, lenders cannot assess creditworthiness. It is essential to build a credit history and maintain a good CIBIL score, which can increase loan eligibility for availing loans at preferential rates. 

If you have a good CIBIL score, you can enjoy several benefits including:  

• One may secure bigger loan principal amounts at attractive interest rates and conditions 
• You can get quicker loan approvals and better leverage when negotiating loan terms with lenders.  
• A higher score can accord discounts for loan-related charges and fees.   
• One can easily qualify for pre-approved loans.  

Every time you apply for a loan, such as a Home Loan or property loan, lenders will examine your credit history and CIBIL score. A low score can get in the way of securing the best loan deals, while good scores will open the doors to the most competitive offerings. Hence, it is important to maintain a good CIBIL score.    

Also Read: What Is Credit Mix and How Can It Improve Your Credit Score?  

Tips to Improve Credit Score

Tip 1: Pay EMIs and Credit Card Bills on Time

Ensure that you pay your loan EMIs and credit card bills promptly to maintain a good credit score. You can also set up auto-payments or reminders to avoid missing payments.

Tip 2: Use Your Credit Card Wisely

Avoid making large purchases or exhausting your credit card limit if you cannot pay off the balance within the same billing cycle. Aim to clear the entire amount due each month to avoid penal charges.

Tip 3: Avoid Multiple Loan and Credit Card Applications

Refrain from applying for too many loans or credit cards simultaneously, as this can negatively impact your credit score. If you need to make multiple applications, space them out over several months. Borrow only when necessary and ensure you have a clear repayment plan to avoid financial strain.

Tip 4: Maintain a Balanced Credit Mix

To improve a low CIBIL score, maintain a mix of secured and unsecured loans. A diverse credit portfolio demonstrates responsible financial behaviour and helps in rebuilding your creditworthiness over time.

Tip 5: Monitor Credit Report

Borrowers and credit users must check their CIBIL report at least once every six months. If they see any mistake or error, they must immediately bring it to TransUnion CIBIL's notice by filling out a CIBIL dispute form. Rectifications take time but are certainly possible.

How Long Does It Take for Your Credit Score to Improve After Paying off Debt? 

There is no fixed timeline for a credit score to improve after paying off debt, as the recovery depends largely on how low the score is and the overall credit history. Consistent on-time payments and responsible credit management gradually help strengthen the score over time. 

Final Words

Maintaining a good CIBIL score is important for accessing loans, including Home Loan or Loan Against Property, at favorable terms. Key factors affecting your score include timely payments, balanced credit utilisation, a diverse credit mix, and minimal loan applications. Regularly monitoring your credit report and addressing errors can further enhance your creditworthiness and loan eligibility.