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When Does Your Credit Score Decrease?

Highlights

  • How does your credit score decrease?
  • What are the effects of a poor credit score - Know all these and more here

Credit score often becomes the reason for acceptance and rejection of unsecured loans such as personal loans. It also helps lenders decide the interest rate on both unsecured and secured loans. The loan acceptance at lower interest rates reduces your outgo. This could be possible if you have a good credit score of 750 and above, which can be achieved by making existing loan or credit card payments on time. But if you go the other way round and commit some other mistakes, your credit score could dip fast. This could render you ineligible for credits in the future. In case you are offered a loan, the interest rate will most likely be higher. In this post, we will talk about the mistakes that can reduce your score. So, read and stay away from committing such mistakes.

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Instances That Can Decrease the Credit Score of Borrowers

Firstly, the credit score is given based on your repayment track of loans or credit cards for at least 6 months to a year. The score, which ranges from 300 to 900 in India, will most likely decrease if there are instances of late payments or defaults, frequent credit applications, a massive rise in the credit utilization ratio, etc. Let’s discuss these bad credit habits in detail.

Late Payments

Paying the loan EMI or credit card dues lately can affect your credit score negatively. If you get late by a day or two, it won’t have a bearing on your score. But if the loan due remains unpaid for more than 30 days, it will reduce your credit score. It’s because the lender would have sent its report to the credit bureau by that time. The report will have late payment marked against your credit account. Seeing that, the bureau will cut your score by some points.

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When a Loan or Credit Card Debt is Written Off

When someone defaults on his/her loan or credit card dues and does not respond to constant payment intimations made by the lender, the concerned credit account gets written off. Lenders mark ‘Written Off’ while submitting their report to credit bureaus, which, in turn, cut the credit score of the particular individual.

High Credit Limit Utilization Ratio

Having a high credit limit utilization ratio can decrease your credit score. The reason being it creates fear that the default could happen. Such an impression makes the credit bureau cut the credit score of the individuals who do this. The credit utilization ratio is associated with a credit card and is defined as the percentage of credit limit utilized to the total credit limit. It is advised not to exceed the utilization limit to more than 30%. So, if you are offered a credit limit of INR 80,000 on your credit card, you should not spend more than INR 24,000 in a month (30% of INR 80,000). But then, you should decide the quantum of spending based on the salary you get. Make sure to keep your credit card spends to around 5-10% of your net monthly income.

High Proportion of Unsecured Debts in a Credit Mix

Having more than one loan is common these days. Someone can have a credit card, personal loan and a home loan together. But when there’s a higher proportion of unsecured debts in someone’s credit mix, it might be viewed negatively by the bureaus. If it leads to non-payment later on, the score would reduce fast. Ensure you don’t need to apply for a fresh unsecured loan when you already have one such debt to pay. Apply only when you need it. If you have fixed deposits, mutual funds, shares, bonds, you can apply for a loan against such financial instruments. The inclusion of a secured loan to the credit mix is seen more positively.

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Making Frequent Credit Applications Despite Facing Rejections

Rejections of loan or credit card applications will decrease the credit score. But a lot of us keep applying for loans or credit cards despite facing rejections repeatedly. Such irresponsible credit behaviour could decrease the score even more. When you apply for a loan or credit card, the lender makes a hard credit enquiry, which could lead to a faster reduction in the score if the loan or credit card application gets rejected.

So, if your application has got rejected, stop applying to prevent further reduction in your credit score. Instead, check the reason that has accounted for a rejection. If it is due to a poor score, you should first check your credit report from any of the top credit bureaus such as CIBIL, Experian, etc. Let the credit score improve by paying your dues on time. Once the score is back to the desired level, think of applying. However, if the rejection was due to insufficient income, you should wait for the time till you have enough to pay the loan dues.

In case you can’t wait, apply for a secured loan against gold ornaments, shares, mutual funds, bonds, etc. Such loans don’t require income and credit score for approval.

Debt Settlement

Debt settlement is an agreement between the lender and borrower where the latter agrees to pay a reduced sum to the former. When that happens, the lender marks it as ‘Debt Settled’ against the credit account of the borrower while submitting its report to the credit bureaus. It may or may not reduce the credit score, but will most likely make borrowers ineligible for unsecured debts in the future.

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How Will a Poor Credit Score Impact Your Financial Life?

A poor credit score can lead to the rejection of unsecured loans such as personal loans, which has been pointed out at the beginning of this article. But what is a poor score? Well, a score below 650 can be called poor and will most likely lead to rejections of personal loans. Even if some lenders agree to offer a personal loan, the interest rate will be much higher. As far as home loans and other secured loans are concerned, the lender won’t deny but will charge a greater rate of interest. Of late, lenders have been offering home loan interest rates based on the credit score.

Conclusion

Now that you know the credit behaviour which could decrease your credit score and make you face the complications that follow, you should avoid displaying it. If you pay your loan or credit card dues on time, maintain an effective credit mix and keep your credit card debt under control, you will benefit yourself only with a good score, which could further result in impressive credit offers for you.

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