Awareness about credit scores, their utility and calculation is still low in India. However with the availability of free credit reports annually (if requested by individual), things could change for the better. So getting a credit report will not cost you anything now (unless you want to get more than four reports in a year) and it will allow you to assess your credit health regularly.
If you have recently checked your credit score because you need a loan or because you want to be credit healthy and it’s not good then read on, we have some useful information for you.
Probable Reasons for Your Score Not Being Great:
CIBIL score calculation is based on five factors, so a low score could most likely mean that you have not paid enough attention to one or more of them. So here are a few possible reasons that could cause your score to be low:
- Irregular Payments: Paying on time is very important as it is the factor that influences the credit scores the maximum. Not paying on time frequently could single handedly spoil your credit rating, not to mention the huge amounts that have to be paid for fines and interest on overdue amounts.
- Overuse of Credit Card: This may not seem like an obvious cause for the score not looking too good but credit card usage also impacts credit score calculation. Overuse of your credit card (more than 30% of the sanctioned card limit) regularly is indicative of over dependence on credit even if you do pay your dues on time and is not good for the rating.
- Applying for too many Loans: Whenever you apply for a loan, the prospective lender seeks your credit report. This is known as a hard enquiry. All hard enquiries are reported in your CIR and too many enquiries in a short span are indicative of credit hungry behavior. Apply for a loan only when you are sure about meeting the eligibility criteria and when you absolutely need one.
- High Proportion of Unsecured Debt: Loans may be secured (when they are backed by collateral) or unsecured (not backed by any collateral). A healthy mix of secured and unsecured loans makes for a healthy credit rating; a higher proportion of unsecured loans could cause the score to be low.
- Settling an Account: If you have an unpaid loan or some old credit card dues and you are thinking about settling it then think again. Settling any account is sure to raise red flags in the minds of any future lender. Getting a loan for low CIBIL scoreis difficult but an account reported as “settled” is sure to make things all the more difficult. What’s more a settled account features in your credit report for up to 7 years.
- Guaranteeing a Loan without being sure: This is something that you may not anticipate to be the cause of a low score. If you have guaranteed a loan and the borrower defaults on it, then not only will it be reported in his/her CIR but it will also be reported in your CIR. Thus your score will also fall, so guarantee a loan only if you are sure about the borrower’s capacity and intentions of repaying on time.
What Can You Do?
The remedy would depend on the cause of the low score. Credit ratings do not get better or worse in a month or two, they reflect your credit history and thus all your credit related activity impacts it. Some impact it more while some impact it less. So if your payments are irregular or if you use your credit card too much then you could start paying regularly and reduces your card usage. You will see a gradual improvement in your score.
If you have already settled an account then there is nothing that can be done except you need to make sure that you are a responsible borrower in future and you do pay your dues on time in the future. Similarly in case you have guaranteed a loan then make sure that the borrowers pay his/her dues on time. Refraining from applying for loans indiscriminately can also help if that is the cause of the problem.
Do remember that credit histories are made over a long period of time and there is no short cut to improving them. Thus if your score is not too good, it’s important that you identify the reason/s for it and the work on it while remembering that it may take time for it to actually improve; so you need to be patient and focused.