CIBIL, or Credit Information Bureau of India Limited, came into existence in 2000. This entity was created by the CIC or Credit Information Company. Now referred to as the TransUnion CIBIL, this credit bureau is responsible for collecting and maintaining the records of credit card payments and loans for both individuals and businesses.
The information related to credit card payments and loans are provided by banks or private lending institutions almost regularly. CIBIL makes use of complex formulae to create the credit score. This is known as the CIBIL Score.
The CIBIL score is the 3-digit score that determines the overall creditworthiness of the borrowers. This score ranges between 300 and 900. A score above 750 is regarded as a good score. One of the major disadvantages of a low credit or CIBIL score is that your credit card or loan application process might be affected. You might have to wait longer than usual for the loan approval process, or there might be more documentation involved. This is why you should always aim to increase your credit score.
What Does a Low CIBIL Score Indicate?
The CIBIL score is a leading scoring model that is used by banks and financial institutions across the nation. Lenders use this parameter to understand your overall creditworthiness. Eventually, this helps them decide whether or not they should advance you any credit.
A score in the range 650 and 750 is regarded as decent. However, applicants having a score of less than 650 will find it difficult to ensure that their credit card or loan applications are approved instantly.
Usually, a low CIBIL Score will imply the following:
- Instant rejection of the credit card or loan application
- A need for providing additional documents to prove your creditworthiness
- Even when your loan application goes through, you might have to incur high interest rates. This is because lenders might consider you a high-risk borrower due to your low credit score.
Common Reasons for a Low CIBIL Score
Your CIBIL or credit score is regarded as the numerical representation of your overall financial behavior. This score is derived from a detailed financial report of all the financial transactions. Lenders make use of this score to understand your creditworthiness every time you apply for a personal loan or file a credit card application.
Several factors affect the credit score, including missed repayments, payment delays, frequent credit inquiries, and a high credit utilization ratio. Here are some common reasons why you might opt for a low credit score:
Missed Bill Payments
All of us struggle with a hectic schedule. Amidst all the chaos, you can easily forget about your electricity or telephone bill unless you are informed of the long-term damage to the CIBIL score.
Most credit reporting institutions keep track of your utility payments. In case you fail to pay your bills, it is depicted in your credit report. This eventually impacts your credit score negatively.
If you wish to avoid this scenario, you can activate the auto-debit facility for your recurring bills to make sure that payments are always made on time. Moreover, you can consider making use of reliable apps that even reward you for timely payments.
Irregular Payments
When you borrow money or take a loan from a lending institution, it is crucial to ensure that all your repayments are made on time. In case you fail to do so, it could result in penalties with a high interest rate. Moreover, it will also impact your credit score negatively to a greater extent.
Absence of Credit History
It can sound confusing. Still, you need to have the proper credit history to obtain credit. Therefore, if you have never possessed any credit card or any utility in your name, like a telephone connection, you might not boast any credit history. This also implies that you will not have any credit score or your credit score will be too low.
To minimize this obstacle, you can apply for a secondary card with someone who has a high credit score, like your spouse or parents. This is a great way to build your credit history while also leveraging the benefit of their high scores.
Multiple Credit Inquiries
It is recommended to be careful with your loan application. The lender will extract information about your credit report. This is known as hard inquiry. This is done every time you apply for a loan. These hard inquiries are reported on your credit file. In case multiple inquiries are reported, this will lower your credit score.
Therefore, you should avoid applying for multiple debts at a time. This can affect your credit score adversely. Even when you get approval for multiple loans, it will impact your repayment capacity. Again, this will reduce your credit score if you are not able to make the repayment on time.
High Exposure to Unsecured Debt
A major amount of outstanding unsecured loan outstanding on your credit cards or in your personal loans is not favorable. It will reduce your credit score by depicting poor financial management. Moreover, you should also maintain a low DTI ratio by balancing your debts and accessing a mix of unsecured and secured loans.
Conclusion
A low CIBIL score can affect your financial opportunities. It makes it difficult to secure credit cards or loans. Still, when you understand the core reasons behind your low credit score, you can take effective actions to improve the same. With smart financial management and discipline, you can easily improve your CIBIL score and boost your chances of loan approval.
