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A high credit score (typically above 750) enhances the chances of getting loans and credit cards at favourable terms, while a low score can lead to loan rejections or higher interest rates.
One of the primary reasons for a low credit score is failing to make timely payments on loans or credit cards.
A credit score is a crucial financial metric that determines an individual’s creditworthiness. In India, credit scores are assigned by credit bureaus such as CIBIL, Experian, Equifax, and CRIF High Mark. A high credit score (typically above 750) enhances the chances of getting loans and credit cards at favourable terms, while a low score can lead to loan rejections or higher interest rates.
Why Does a Credit Score Get Low?
Several factors can negatively impact a credit score in India:
1. Late or Missed Payments: One of the primary reasons for a low credit score is failing to make timely payments on loans or credit cards. Even a single missed payment can bring down the score significantly.
2. High Credit Utilisation Ratio: If a person frequently maxes out their credit limit or uses more than 30-40% of their available credit, it indicates high dependency on credit, which lowers the score.
3. Multiple Loan Applications: Applying for multiple loans or credit cards within a short span can lead to multiple hard inquiries, reducing the credit score.
4. Defaulting on Loans: Non-repayment or settlement of loans negatively impacts credit history, making future borrowing difficult.
5. Errors in Credit Report: Sometimes, incorrect information in the credit report, such as a wrongly recorded missed payment or an unrecognised loan, can lower the score.
6. Lack of Credit History: Not having any credit (loans or credit cards) can also result in a low or no credit score, making it difficult for lenders to assess a person’s creditworthiness.
7. Frequent Opening and Closing of Credit Accounts: Constantly opening and closing credit accounts can create instability in credit behaviour, impacting the score negatively.
How to Maintain a High Credit Score in India
Maintaining a good credit score requires financial discipline and responsible credit behavior. Here’s how one can keep their score high:
1. Pay Bills on Time: Timely payment of EMIs, credit card bills, and utility bills ensures a positive credit history. If any EMI is pending and overdue, clear that as soon as possible.
2. Maintain a Low Credit Utilisation Ratio: Ideally, one should keep their credit utilisation below 30% of the available limit to show responsible credit usage.
3. Monitor Credit Report Regularly: Checking credit reports periodically helps identify and rectify errors that might be affecting the score.
4. Limit Loan Applications: Applying for credit only when necessary prevents multiple hard inquiries and safeguards the credit score.
5. Diversify Credit Mix: A healthy mix of secured (home/car loans) and unsecured credit (credit cards/personal loans) contributes positively to the credit score.
6. Maintain Old Credit Accounts: Keeping old credit cards open (even if not in use) can help maintain a long credit history, which positively impacts the score.
7. Avoid Settlements and Defaults: Instead of defaulting on a loan, one should try restructuring repayment plans with the lender to prevent a negative impact on the score.
