A credit score is a 3-digit number between 300 and 900 that is statistically generated and summarises your past track record of debt instruments such as loans and credit cards. To determine your creditworthiness for a future loan or a credit card, banks and other financial institutions rely on credit scores, among other factors. Also, your current credit score may affect the interest rates offered to you. Any score below 750 is regarded as a bad credit score in India, where your credit score can range from 300 to 900. The lower your credit score, the greater the risk-perception of the lender as a borrower regarding you. Thus, a bad credit score may lead to your loan/credit card application being rejected or higher interest rates may result. Therefore, being aware of key factors that may lead to a bad credit score is very important.
Some of the main factors leading credit bureaus like CIBIL TransUnion, Equifax India, and others to give you a bad credit score are as follows:
FREQUENT DEFAULTS OR LATE REPAYMENTS OF DEBT
Including loans and credit card dues, your debt repayment history represents approximately 30-35% of your total credit score. Your lender reports that default or late payment to the credit information bureaus, who in turn deduct points from your current credit score, each time you default on your debt repayment or pay the outstanding amount after the due date. Factors such as the size of the outstanding loan/credit card bill, the number of late payments in the past, the number of days after the late payment was made, etc. may affect the exact deduction amount from your credit score. In addition, this late payment information continues to be on your credit report. Thus, make sure you stick to your repayment schedule and keep as clean as possible your repayment record.
HIGH CREDIT CARD UTILISATION RATE
The utilization rate of credit cards is an important lending risk indicator and is used in most processes of credit scoring. This rate reflects your average credit card balances across all your cards against your available credit card limit. Although an increase in credit card spending does not in itself lead to a low credit score, the excessive use of your credit limit indicates that you are a credit customer who is hungry and unable to properly manage your finances. Ideally, across all cards, your credit card fees should not be more than 30-40 percent of your total credit card limit. For example, if your credit limit on a card is Rs 60,000 and you plan to buy an item worth Rs 30,000, your rate of credit utilization will shoot up to 50 percent. However, if you have a second card with a raised credit limit of Rs 30,000, the rate of use will fall to about 33 percent, which is well below the 30 percent to 40 percent limit.
HIGH PERCENTAGE OF UNSECURED LOANS
Secured loans, such as home and property loans, are considered good loans, as they are usually used for the purpose of creating assets or generating income. Your credit score is improved by the timely repayment of these loans as it reflects your trait of using your available credit options wisely. On the other hand, unsecured loans are mainly used to fund personal consumption, such as credit cards and personal loans, so too many of them reflect poorly on your credit behavior, leading to a bad credit score. In addition, unsecured loans usually carry higher interest rates than secured loans, resulting in higher interest payouts and therefore having a negative impact on your ability to provide fresh credit.
TOO MANY CREDIT ENQUIRIES
A credit inquiry is raised by the prospective lender every time you apply for a loan or a credit card, which is then recorded in your credit report and shows up when your credit score is pulled by another prospective lender. As these inquiries are dated on the credit report, you are represented as a credit-hungry person who desperately needs money and therefore a potential credit risk by too many credit inquiries within a short span of time. In your credit report, the credit bureau notes this and lowers your credit score accordingly, which makes it more difficult for you to get approved for new loans or credit cards.
LENDER’S FAILURE TO REPORT YOUR DEBT REPAYMENTS
Banks and other creditors often fail to inform the credit bureau of your recent debt repayments. This may result in closed credit accounts being shown on your credit report as active and previously paid credit card fees or EMIs being shown as outstanding ones. Thus, your credit report continues to show incorrect information through no fault of your own, which then contributes to a poor credit score. Therefore, to ensure that all your repayments have been duly recorded in your credit report, it is important to check your credit report at regular intervals, at least annually.
OPTING FOR SETTLEMENT INSTEAD OF REPAYING YOUR DEBTS
Through a one-time settlement with the lender, individuals who fail to repay their debts in full are often lured into settling their dues. Although the borrower receives a steep discount on his or her total dues, the lender reports to the credit bureaus that settlement. Such a kind of debt would appear on the credit report with a “settled” tag that severely impacts the credit score of the individual. Because of the bad credit score, due to the failure of the borrower to repay his previous debts, the prospective borrower is viewed as a credit risk.
DEFAULT IN ACCOUNTS WHERE YOU ARE A CO-SIGNED OR A GUARANTOR
You are equally liable for defaults made by the primary applicant in the event of co-signed, guaranteed, or jointly held loan accounts. Therefore, if you pay the due amount after the primary applicant has defaulted on the loan, any default by the primary applicant will also show up on your credit report and bring down your credit score.