What are the Consequences of Having a Low CIBIL Score and How to Avoid Them?

The CIBIL score is a three-digit number that lenders check to assess a borrower's repayment capacity, creditworthiness and ability to repay a loan on time. Borrowers who have a responsible attitude towards credit, borrow money cautiously and make timely repayments. Hence, they automatically have a high CIBIL score. On the other hand, borrowers who borrow more than they can repay, are more likely to miss out on loan EMIs and credit card bills resulting in a low CIBIL score. A low CIBIL score indicates a high risk for the lender in lending money. Therefore, lenders either reject loan applications from borrowers who have a low CIBIL score or to cover up for the risk involved in lending money to them, lend them money at a very high rate of interest. Thus, borrowers who have a low CIBIL score are advised to improve their bad CIBIL score first and then apply for a loan.

A low or bad CIBIL score not only makes it difficult for borrowers to get access to credit but these days, it may also affect their chances of landing a good job profile. These days, most employers check an individual's CIBIL score before extending them a job offer. They do this to safeguard the interest of other employees as well as to protect the company. Similarly, some cautious homeowners also check the CIBIL score of applicants to make sure they are not renting out to someone who will prove to be a bad tenant. The same goes for insurance companies - insurance companies charge a higher premium from borrowers who have a low CIBIL score.  

In conclusion, a bad CIBIL score is something that borrowers must protect themselves at all costs. The question is: what should one do if they have a bad CIBIL score? Is it possible to improve a bad CIBIL score? If yes, how? In our next section, we look at reasons that cause a borrower's CIBIL score to drop down and share tips on how to improve the CIBIL score. 

Here's Why You Have a Bad Credit Score

1. Your Repayment History is Dubious

Different credit information bureaus use different methods to calculate a borrower's CIBIL score and in all methods, the repayment history plays a crucial role in determining a borrower's CIBIL score. In fact, a borrower's repayment history makes up roughly 35% of their credit score. If you are someone who pays loan EMIs and credit card bills on time and has never defaulted on credit payments, yours will be a clean repayment history and your credit score will be excellent. However, if you have missed EMI payments in the past or have defaulted on loans, your CIBIL score will be low. 

Also Read: 7 Tips to Help You Improve Your CIBIL Score 

2. You Have a High Credit Utilization Ratio

How you use your credit card also impacts your CIBIL score. The credit utilization ratio is the ratio of credit used to credit available. Borrowers who exhaust their credit cards' limits and then keep paying only the minimum amount due have a high credit utilization ratio. Since the credit utilization ratio makes up almost 30% of a borrower's CIBIL score, such borrowers and credit users have a low CIBIL score.

3. You are Highly Dependent on Credit

Some borrowers borrow money even though they do not need to, and credit information agencies and lenders do not like such borrowers. Every time a borrower applies for a loan or a credit card, a hard enquiry gets registered in their name. A hard enquiry is an enquiry made by a lender to know a borrower's creditworthiness. Too many hard enquiries within a short span indicate a borrower's overreliance on credit and portray a borrower to be credit-hungry. If you apply for loans and credit cards often, you will have a low CIBIL score.  

4. You do Not Have a Varied Credit Mix

Loans are of two different types: secured and unsecured. Secured loans are backed by collateral and unsecured loans do not have the backing of any asset. Lenders charge a lower rate of interest on secured loans and therefore, most borrowers opt for only these types of loans. This is not how it should be, and this will lead to you having a bad CIBIL score since it indicates your ability to handle only one type of credit.  

5. There are Errors in Your CIBIL Report

Credit information agencies assign a borrower a credit score based on the information provided to them by lenders and financial institutions. Since lenders maintain records on millions of customers, sometimes they pass on wrong information regarding a borrower or credit user to a credit rating agency. A borrower's credit score can drop due to an error in their credit report, and this is not uncommon. A survey showed 20% of all credit users have seen an error in their credit report at some point.

Tips to Improve Credit Score

#Tip 1: Always pay loan EMIs and credit card bills on time. If you tend to forget the due date, set up auto-payments or reminders. If you are going through a bad financial phase, connect with your lender, explain to them your situation and ask them for a relief period. Arrange money as soon as you can and clear loan EMIs and credit card bills immediately.  

#Tip 2: Never make big purchases using your credit card or exhaust your credit card's limit if you do not plan on clearing the debt the same month. Always try and clear the entire amount due each month and if you are an impulsive buyer or shopper, talk to your credit card company and ask them to customize your credit limit so that you find yourself unable to spend more than the specified amount set by you in a day. 

#Tip 3: Never apply for too many loans and credit cards together. If you have to make more than two applications, spread them out over a few months. More importantly, borrow money only when you need it and when you know you will be able to repay it easily. 

#Tip 4: Do not only avail of secured loans. If you have a bad CIBIL score and want to improve it, avail yourself of both secured and unsecured loans. 

#Tip 5: 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. 

Also Read: Top 10 Reasons for Low CIBIL Score and How to Improve It  

Final Words

Some borrowers do not take the concept of CIBIL score seriously, even when they should. Before applying for any kind of loan like Home Loan or  Loan Against Property, check your CIBIL score first and if your CIBIL score is below 750, use the tips above to make your CIBIL score reach 750 at least and then apply for a loan.