One of the most important markers of your financial wellness is your credit score. Unfortunately, in India, there is a lack of understanding about credit scores and their relevance in one’s life.
You may improve your credit score by following some fundamental rules. However, even if you were doing something you felt was beneficial, the activities you perform that truly affect your score are often unnoticed.
Despite paying your monthly EMIs and credit card bills in full, you may see a drop in your credit score and wonder what went wrong. While most people are aware of the basic elements that contribute to a good credit score, there are a few lesser-known aspects that might cause your credit score to drop.
5 reasons why your Credit Score might drop
1. Missed Payment
Remember that few things will always hurt your score like a late EMI payment which forms a part of credit you are utilizing. This is such a big deal owing to the fact that the credit scores depict the likelihood of your repayment capabilities on any debts you owe. Not paying on time or not paying at all is a red flag that shows your inability to payback. Not just this, while you may pay off your balances on time, a single late payment will make your credit card scores slip a little out of hand. This is why agents often recommend automated payment systems, or e-reminders for the payment due dates.
2. Credit Utilization Ratio
This is the proportion of available credit to credit that you are using. A credit usage percentage may be calculated by dividing the entire credit account balance by the total credit limit and multiplying by 100. While criteria vary depending on the scoring method used, credit usage is a major consideration. This is because it provides creditors with information about your credit utility and trend. A utilisation rate of less than 30% is optimal. Anything greater might indicate reckless credit behaviour, resulting in worse credit ratings.
3. When you Paid off an Existing Loan
While paying off a credit card amount raises your CIBIL score, paying off a debt in instalments may have the reverse impact. This is due to the fact that paying off a loan means you have one fewer account in your name, and your potential credit limit reduces as well. Having several categories of credit in your profile, such as secured, unsecured, long-term, and short-term loans, accounts for a significant portion of your credit score since it demonstrates that you can properly manage various types of credit.
Don’t put off paying off your debts because you’re afraid of losing your credit limit or your credit score. It is beneficial to your financial health to be debt-free, and it makes no sense to keep your loans and pay interest costs unnecessarily.
4. Opening New Accounts or Multiple Enquiries
You will also experience a drop in credit score if you have made multiple enquiries while applying for a new product, offer have taken a new credit card. When you allow any financial institution or lender to pull out CIBIL report to check whether you are eligible for the applied or not then it will affect your credit score. Hence, rather than making multiple enquiries with multiple lenders, do your market research on the products, and then apply with the lender who you found will give you the approval. Enquiries make 10% of your credit score. So we suggest you to avoid making multiple enquiries.
5. Closing Credit Card
Closing a credit card, especially an old one, can significantly hurt your score since it not only reduces your overall available credit limit but also brings down the age of your credit history. Remember, your credit history makes a large percentage of your CIBIL score. That is why experts suggest starting building credit from a young age and retaining old accounts and cards even if you are no longer using them. The more extended history you can keep, the better it is for your score.
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