A healthy credit score has become essential in the country, especially with lending institutions tightening underwriting and loan disbursal norms. Banks are now increasingly relying on the credit score and creditworthiness of borrowers as provided by prominent credit bureaus.
Still, borrowers regularly see their credit scores drop without realising the reasons behind the dip. Here are six major factors that can contribute to the decline of your credit score and harm your credit profile. As a prudent borrower, you must keep these factors in mind to ensure that borrowing continues to remain a pleasant experience.
1. Late or missed payments
Payment history is the most important and the single largest constituent of one’s credit score. Even a one-day delay in clearing out your credit card bills and personal loan EMIs can trigger a visible decline. In serious cases, the missed payments can stay on your credit profile for years.
Consistent delays are a clear signal for lenders of financial stress. A credit score of 750 or more is considered a healthy score by financial institutions. Now, a minor delay can bring such a score down by 50 to 70 points, thus making future credit cards and personal loans difficult to secure.
2. High credit utilisation
Your credit utilisation ratio, the share of your used credit limit, should ideally stay below 30%.
- Problems crop up when credit card users max out their cards irresponsibly.
- When you frequently exceed 50-60% of your credit limit, this is a clear indication of credit card debt. Such behaviour can harm credit profiles and bring down credit scores.
3. Multiple loan or credit card applications
Every time you apply for credit, i.e., a new personal loan or a credit card, a hard inquiry is added to your credit report. Too many applications in a short time can lower your credit score and make you look risky to lenders, which may lead to higher interest rates and very strict repayment terms.
4. Holding too many unsecured loans
Unsecured debt, i.e., debt not backed by collateral, personal loans and credit cards, is a prominent example. Such debt carries a higher risk weight. Now, a portfolio skewed heavily towards unsecured credit suggests instability.
A balanced credit mix includes a reasonable combination of unsecured and secured loans. Such a credit mix tends to improve creditworthiness and can also boost future loan eligibility.
5. Errors in your credit report
Outdated personal loan entries, incorrect personal details, or wrong delinquency tags can harm your credit score. Always review your free annual credit report from leading credit bureaus such as CRIF High Mark, CIBIL, Experian and Equifax, post the same raise relevant disputes through the official channels to ensure that your credit profile remains healthy and your credit score continues to remain high.
6. Closing old credit accounts
Older accounts have the potential to lengthen your credit history, which boosts your credit score. Especially the ones with a clean repayment record. If you opt to close such accounts, it will shorten your repayment track record and may bring down your overall credit score and decisively alter the fate of your credit profile.
That is why maintaining a strong credit profile requires sincerity, discipline and periodic monitoring along with responsible use of credit. Furthermore, with lending institutions increasingly becoming data-driven, a healthy credit score continues to remain one of the strongest financial assets for consumers in the country.
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