cibil score

Why Your CIBIL Score Dropped? 5 Reasons to Know

The eligibility to get a loan is highly dependent on your CIBIL score. It is one of the most significant factors that lenders look for when sanctioning a loan. An ideal credit score value must be above 700 so that you can apply for a loan from a reputed lender. If it is lower than the required value, then there are several ways you can try to improve your credit score fast.

You may be saddened to see your credit score dip even when you are paying your EMI’S, bills, or any other payments on time. There are many reasons why your credit score may have dipped recently. Even getting approved for new credit can negatively affect your credit score.

One should keep in mind that the credit score is not just a fixed number and it keeps changing from time to time. We have curated a list of many potential explanations that may help you understand why your credit score drops and how you can address each of them.

1. Recently Applied for a Loan

When you apply for a loan, lenders pull out a hard inquiry on your credit report to evaluate how well you manage your finances. They also do this to check whether you are regular with your repayments before lending you a loan. A hard inquiry made by the lenders may temporarily lower your credit score.  However, you can lower this risk by making regular payments of your EMIs.

Applying for a loan and repaying the credit on time is one of the most successful tips to build your credit score. Hard inquiries are not so bad and are okay if done in moderation. However, to minimize the number of hard inquiries on your credit report do this:

  • Try comparing between different lenders first and choose the best one for applying for a loan
  • Do not apply for several loans at a time
  • Research properly and choose a lender that best suits your eligibility, requirements, and budget
  • If you want to apply for multiple loans, spread your applications out over time and wait as long as possible while applying for a loan
  • Apply for a loan only when require especially if your score is already low

2. Recently made an Expensive purchase on Credit Card

To avoid paying the entire cost upfront, many people use their credit cards to make large purchases. This could leave a large balance on your credit card and a high credit utilization rate, thus, reducing your credit score. You must keep your credit utilization rate to the minimum since using most of your available credit limit can pose you as a high-risk borrower. Minimum credit utilization is around 30-40%. Utilizing your credit limit above this value can make lenders reluctant to sanction a loan amount.

Ensure that you pay off your credit card bill before the end of the billing cycle, especially when a large purchase is made. Because carrying a large balance on your credit card will increase your credit utilization rate and cost you a high-interest rate.

3. Missing your Loan EMI

Lenders check your payment history before offering you a loan. So, it is one of the most critical factors that determine your credit score. Missing a single loan EMI can immediately negatively impact your credit score. Also, lenders pay more attention to your repayment habit while lending a loan. If you miss your repayments, lenders may consider you a high-risk borrower and may hesitate to provide you with the loan.

Not paying EMI on time or missing them can cause a drop in your CIBIL score. However, you can quickly retrieve it by making the payment early along with the interest rate charges for late payment. A good history of repayment means an excellent CIBIL score.

4. Paying off an Existing Loan

Paying off your credit card balance may undoubtedly increase your CIBIL score. However, if you are paying off an installment debt, you may observe a drop in your CIBIL score. This is because paying off a loan means one less loan to pay and a low credit score. On the other hand, having different types of credit under your profile, including secured, unsecured, short-term, or long-term loans, can make a large percentage of your credit score since it shows that you can manage different types of credit responsibly.

Make sure you do not avoid paying off your loans due to the fear of losing your credit limit. Being debt-free can improve your financial health and retain your loans.

5. Closing an Old Credit Card

Closing an old credit card can significantly hurt your overall credit score. It not only brings down your overall available credit limit but also reduces the credit history age. Remember, the older your credit history, the larger the percentage of your CIBIL score. This is why many experts suggest starting building credit from an early age and retaining old cards and bank accounts even if you are no longer using them. The more extended your credit history you can keep, the better it is for your score.

So, now that you have learned the top 5 reasons for your CIBIL score drop. Make sure you keep all these points in mind to get a loan quickly. Remember that most CIBIL score dips are temporary and easy to recover. Keep a check on your CIBIL score from time to time and be alert whenever you suddenly notice a reduction in your score.

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