In today's financial landscape, maintaining a healthy credit score has become crucial for Indian borrowers. With lending institutions tightening their underwriting standards and loan disbursal norms, banks are increasingly relying on credit scores provided by prominent credit bureaus to assess borrower credibility.
Understanding Credit Score Drops
Many borrowers experience unexpected declines in their credit scores without understanding the underlying causes. As a prudent borrower, being aware of these factors can ensure that borrowing remains a smooth and pleasant experience. Here are the six major elements that can negatively impact your credit profile.
1. Late or Missed Payments
Payment history constitutes the most significant component of your credit score, accounting for the largest share in the calculation. Even a single day's delay in clearing credit card bills or personal loan EMIs can trigger a noticeable decline in your score. In more serious cases, these missed payments can remain on your credit profile for several years.
Consistent payment delays signal financial stress to lenders, making them cautious about extending credit. A credit score of 750 or above is generally considered healthy by financial institutions. However, even a minor delay can reduce such a score by 50 to 70 points, potentially making it difficult to secure future credit cards and personal loans.
2. High Credit Utilization Ratio
Your credit utilization ratio, which represents the percentage of your available credit that you're using, should ideally remain below 30%. Problems arise when credit card users irresponsibly max out their cards or consistently utilize high portions of their credit limits.
Frequently exceeding 50-60% of your credit limit indicates potential credit card debt issues. Such behavior not only harms your credit profile but can significantly bring down your credit score, affecting your overall financial health.
3. Multiple Credit Applications
Every time you apply for new credit, whether it's a personal loan or credit card, a hard inquiry gets added to your credit report. Too many applications within a short period can lower your credit score and make you appear financially risky to lenders.
This perception of risk may result in higher interest rates and stricter repayment terms on approved loans. It's essential to space out your credit applications and only apply when absolutely necessary.
4. Excessive Unsecured Loans
Unsecured debt, including personal loans and credit cards that aren't backed by collateral, carries higher risk weightage. A credit portfolio heavily skewed toward unsecured credit suggests financial instability to potential lenders.
A balanced credit mix that includes a reasonable combination of unsecured and secured loans tends to improve creditworthiness. This diversified approach can also boost your eligibility for future loans with better terms.
5. Errors in Credit Report
Inaccurate information in your credit report can unnecessarily harm your credit score. Common errors include outdated personal loan entries, incorrect personal details, or wrong delinquency tags. Regularly reviewing your free annual credit report from leading bureaus like CRIF High Mark, CIBIL, Experian, and Equifax is crucial.
If you identify discrepancies, promptly raise disputes through official channels to ensure your credit profile remains accurate and your credit score stays high.
6. Closing Old Credit Accounts
Older credit accounts, particularly those with clean repayment records, help lengthen your credit history, which positively impacts your credit score. Closing such accounts shortens your repayment track record and may decrease your overall credit score.
This action can decisively alter the fate of your credit profile, so consider carefully before closing longstanding credit accounts, even if you're not actively using them.
Maintaining Financial Health
Building and maintaining a strong credit profile requires sincerity, financial discipline, and periodic monitoring along with responsible credit use. As lending institutions become increasingly data-driven, a healthy credit score remains one of the most valuable financial assets for Indian consumers.
By understanding these six factors and implementing prudent financial habits, borrowers can protect their credit scores and ensure continued access to favorable credit options when needed.
