Paying only the minimum amount due or balance transfer on credit cards
It may seem smarter to only pay the minimum amount due to keep the card open or for the purpose of balance transfer; however, such practice must be avoided. The unpaid due continues to remain a liability and negatively impacts the score. You must make a habit of paying the entire amount due on time every month.
Credit utilization going over 30% or not maintaining your credit limits
Credit utilization ratio is a very significant contributor to your credit score, comprising anywhere between 25%-33% of it. Credit utilization is calculated by dividing your total outstanding balance by the aggregate of all your credit limits expressed as a percentage.
For instance: If the credit limit on your card is Rs.1 lakh, and you spend Rs.60,000 on an average, your credit utilization is at 60%. Try and bring it down to 30% or lower. If your credit utilization is ideally supposed to be low, but you have a relatively low credit limit, you must look to increase your credit limit. In cases of very high credit utilization, multiple cards can be used to reduce the utilization on a single card.
Missing a payment due to forgetfulness or not setting up reminders
It bears mentioning that your payment history comprises roughly 25-30% of your overall CIBIL score. Therefore, whenever a payment is rendered late, it leaves a negative impact; however, such impact is only temporary. Multiple defaults leave a longer-term impact on the credit score, especially in cases where the payment is consistently rendered late. It is therefore important to set up reminders in advance regarding date of payment due.
Applying for multiple loans and credit cards simultaneously
Credit inquiries conducted on an individual have a direct impact on his credit score; hence it is essential to avoid too many credit inquiries. Applying for multiple loans in the hope that one of them gets approved is not a wise strategy because the more applications one makes, the lower his credit score is likely to become. Each time an individual applies for credit, a hard inquiry is made that remains visible on the credit report for 36 months. It is therefore important to evaluate and improve one’s credit score before applying for credit. Furthermore, one must also note that applying for multiple credits reduces one’s creditworthiness in the eyes of lenders.
Closing credit cards that have the longest credit age
The oldest credit card is a good credit booster, because it highlights the length of your credit history. There are numerous reasons why one may want to close a credit card; however, closing the oldest card should always be avoided. Doing so may also increase credit utilization ratio, thus reducing the credit score. It is therefore important not to close cards that do not have an annual fee.
Paying back a loan as a settlement instead of clearing the entire balance
Sometimes financial institutions offer to settle the loan by allowing the borrower to only pay back a portion of the amount due. Although such an option allows for faster closure of the loan, it negatively impacts the credit score of the borrower. It is therefore important to ensure that such an option is exercised only when necessary. If possible, the entire outstanding balance on a loan must be paid back in order to close the account as paid. If there is an existing entry of a loan being settled, there is always an option to clear the remaining balance in order to close the account as paid.
Not being aware of your co-borrower’s or guarantor’s repayment history
A lot of times, people fail to understand that a loan taken by someone else with their name on it as a co-borrower or guarantor also has an impact on their credit score. Whenever a default occurs on such a loan, it affects the credit report of the co-borrower or guarantor as well. It is important to ensure that the person taking the loan with your name on it has a good repayment history.
Not checking one’s CIBIL credit report at least once a year
Credit reports can sometimes have errors that adversely affect one’s credit score without the knowledge of the individual. Therefore, it is necessary to check one’s credit report for any errors and bring them to the notice of the concerned authority.
How to check my CIBIL score
If you are wondering how to check my cibil score, you can check your CIBIL score for free once a year directly on the CIBIL website (cibil.com). Besides this, most banks and lending companies provide the option one would use to check CIBIL score online at no extra cost. Checking your CIBIL score through a bank or NBFC does not impact your credit score.
Not using any type of credit at all
Having no credit history in India may sometimes work against you since it may lead to a low credit score. It is therefore important to have at least some sort of credit history, whether it is a credit card or a loan that you can repay religiously on time and in full every month.
Missing an EMI or credit card payment due to low balance.
Auto-debit of any sort can fail due to lack of balance in the linked account. Such failures show up on your credit report as delinquency, thereby impacting your credit score negatively. Furthermore, it may also result in penalty charges. It is therefore important to maintain a small balance in the linked account before the due date in order to prevent such failures.
How to improve CIBIL score:
- Make sure to repay all EMIs and dues on time every month.
- Maintain a low credit utilization ratio, preferably below 30%.
- Do not close credit cards that have the longest credit age.
- Apply for new credit only when you are confident about repayment.
- Check your CIBIL report a couple of times every year.
A healthy CIBIL score can also work in your favor by helping you get a loan at a lower interest rate. At InstaMoney, we believe that loans must be easy, simple, and most importantly transparent. InstaMoney is a digital lending platform that connects borrowers with personal loan providers. We lend directly through our NBFC lending partners to provide borrowers with an easy, quick, and transparent personal loan experience. Our loan partners always show the applicable loan terms and charges upfront, and a good CIBIL score can increase your chances of approval.
