Top Reasons Why Your CIBIL Score Is Going Down

Your CIBIL score is subject to your credit behavior – and hence it is changing the way you are managing your credit. It is no hidden fact that lenders check your CIBIL scores when you apply for a loan. As such, if you happen to buy a home and are looking for a housing loan to fund your needs, you can’t expect one without a good CIBIL score. And if you are paying your dues regularly and keeping your credit utilization low but still find your credit score rolling down, here could be some reasons.  

Five Reasons Your CIBIL Score is Going Down

There are many factors that affect your credit rating. Here are a few facts that can help you understand how your CIBIL score may experience a sudden drop: 

1. Multiple Lines of Credit 

Holding numerous credit cards, secured loans and unsecured credit can hurt your CIBIL score as these are signs of heavy debt. Lenders usually calculate your debt-to-income (DTI) ratio when considering loan approvals. A higher DTI proves that you are already overburdened with EMIs and bills, and they may be unwilling to extend a loan.  

2. Delayed Payments 

Delayed payments and nil payments can adversely affect your CIBIL score and credit history. Your previous repayments convey how seriously you take your debts. Therefore, honour your debts on time and monitor your accounts to ensure no payment is missed.  

3. Increased Credit Limit 

In certain instances, a request to raise the credit limit may diminish your score because this tells lenders that you are overly dependent on credit. Thus, keep an eye on your credit utilisation, maintain low balances and obtain new credit in moderation only when required. 

4. Not Having the Right Credit Mix 

A healthy credit mix of both secured and unsecured loans spanning short and long tenors contributes to a higher credit score. A balanced combination of revolving credits like credit cards and non-revolving credits such as a loan demonstrates that you can handle diverse types of credit. 

5. Under-Utilization of Credit Cards 

Many people are wary of using credit cards assuming that it may lead to bad credit habits and unnecessary spending. However, zero transactions on credit cards could render your credit file inactive, downgrading the CIBIL score. 

Also Read: 10 Tips to Help You Improve your CIBIL Score  

Understanding the Anatomy of Your Credit Score

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 that makes up 30% of the credit score. It records all your credit payments like 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 drastically lower it.

Credit Exposure

Credit exposure or the credit utilisation ratio constitutes 25% of your credit score. Credit utilisation denotes your credit usage in proportion to the available credit limit, and a ratio of over 30% will project you as a high-risk borrower causing a dip in your credit rating.

Credit Type and Duration

25% of your 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 cover 20% 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 

Benefits of Good Credit Score 

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

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

• ​One may secure bigger loan principal amounts at attractive interest rates and conditions. 
• Borrowers can choose a longer loan tenor to make repayments easier.   
• You are assured of quicker loan approvals and greater leverage when negotiating loan terms with lenders. 
• A higher score accords 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 bad score can get in the way of securing the best loan deals, while satisfactory scores will open the doors to the most competitive offerings. Hence, it is crucial to always maintain a good CIBIL score. But if it is below expectations, one should consider remedial measures to improve the CIBIL score through systematic financial practices.     

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