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Top 5 Reasons for Why You May Have a Low Credit Score

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When you apply for a loan or a credit card, your creditworthiness is assessed by the financial institution. The lender checks your CIBIL Score for understanding your credit history and how you have managed your past borrowings.

An aggregate credit score value ranges between 300-900. A credit score value between 750-900 is desirable for establishing decent borrowing and repayment credentials. For your credit score check, you can visit a bureau’s website. 

For the CIBIL Score check, you need to fill in a few personal details, and you can check your current CIBIL Score.

Did you check the credit score lately, and the number left you a bit disappointed? Do you want to ensure you maintain your decent CIBIL score? Let us look at why you may have a low credit score and how you can improve upon it.

First Time Borrower:

A first-time borrower does not have any credit history to show. For example, youngsters in their first jobs may not have any loans or cards in their name. Hence, the credit score may be low. You can gradually build your borrowing credentials as you take credit cards and loans in your name.

Missed EMIs and Late Repayments:

Every loan is the user’s responsibility to track its usage, EMI due dates and timely repayment month after month. Any default mars the borrower’s credentials and may indicate a casual attitude towards personal finance. 

Frequent defaults and late payments across products attract penalties and reflect poorly on your credit score. To maintain a good credit score, you need to keep track of all your loan accounts and schedule automated EMI and card payments to avoid last-minute misses and delays.

Multiple Loans Across Banks:

When a borrower applies for multiple loans simultaneously, a bank or financial institution passes the information to credit agencies as borrowers’ financial history. The credit bureau’s credit score algorithm takes a negative view of multiple applications, adversely affecting the credit score.

Similarly, if multiple personal loans run across banks, high leverage may indicate a propensity for increased debt, repayment risk on multiple EMIs, and poor financial management. Therefore, a borrower needs to be mindful before applying for multiple loans simultaneously.

Utilised Credit Limit to the maximum:

Some borrowers use 100% of their credit limit on credit cards and loans. Borrowing to the brim and hitting the credit limits will impact the credit score. High leverage indicates that finances and expenses are not in order, and it may affect the CIBIL score of the individual.

Type of Loans:

Every loan that a borrower takes fulfils a particular financial need. The right mix of secured and unsecured loans in a borrower’s kitty work towards a good credit impression. Secured loans entail collateral in case there is a default. These loans are safer for banks due to risk hedging. Therefore, they add more weight to a borrower’s credit score. A portfolio of only unsecured loans, e.g. personal loans, may negatively impact the credit score.

You can live your dream life, buy a dream home, take a dream vacation and shop what your heart desires when you have access to money at the right time. Loans and credit cards help you enjoy these milestones without a substantial financial burden. A good credit score will ensure a better interest rate, faster loan process, and higher quantum of loan to avail of these loans.

Clare Louise

The author Clare Louise