Why Did My Credit Score Drop?

5paisa Research Team Date: 08 Feb, 2024 05:04 PM IST

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Why would my credit score drop? Let’s find out the answer to this question in this post. When an individual applies for a loan or credit card, an individual CIBIL score plays an essential role. A low score might lead to application denial or approval with high-interest rates and annual fees. The CIBIL scale, ranging from 300 to 900, sees a score above 750 as favorable for approval. Conversely, a score of 650 or lower diminishes the likelihood of approval. Understanding the reasons behind a dropping CIBIL score empowers you to take proactive steps. So, let's explore the reasons why my credit score dropped and tips to improve the score. 

Top Five Reasons Your CIBIL Score is Dropping

Some of the main reasons for having Low CIBIL Score are: -
   

1. Late or Missed Payments
One of the most common reasons why has my credit score dropped is late or missed payments. An individual payment history accounts for around 35% of the overall CIBIL score; hence, any delays or defaults can significantly impact it.

If you have a habit of missing credit card payments or loan EMIs, it will reflect in your credit report and lower your CIBIL score. Even a single missed payment can cause the score to drop, so it is essential to make timely payments.

2. Too Many Credit Applications
When an individual applies for a loan, the lender or financial institution makes an inquiry into your credit report. This is known as a hard inquiry and can temporarily lower your CIBIL score by a few points.

However, If you multiply these hard inquiries within a short period, it can signal to lenders that you need money as soon as possible, which can lower your CIBIL score. So, it is important to apply for a loan only when you need it and not for unwanted expenses.

3. High Credit Utilization Ratio
Another reason for a dropping CIBIL score could be a high credit utilization ratio. An individual credit utilization ratio is the percentage of available credit you are using recently. Ideally, it would be best if you kept it below 30% to maintain a healthy CIBIL score.

If your credit card balance is constantly near or at its limit, it shows that you are highly reliant on credit, which can negatively impact your CIBIL score. To improve this, try to keep your credit utilization ratio low by making regular payments and not maxing out your credit card.

4. Wrong Information on Credit Report
Another reason for your dropping CIBIL score could be incorrect information on your credit report. Errors in the credit report can happen due to various reasons, like data entry mistakes or identity theft.

So, for best results, check your credit report regularly and dispute any errors you find immediately. You can do this by raising a dispute with TransUnion CIBIL, and they will investigate the issue and make necessary corrections.

5. Financial Setbacks
Life is unpredictable, and financial setbacks can happen to anyone at any time. Job loss, medical emergencies, or various other unexpected circumstances can impact your ability to meet financial obligations. While credit bureaus may not sympathize with your challenges, they do understand the situation. 

In this case, communicate proactively with creditors, explore restructuring options, and keep the lines of communication open. A well-negotiated solution can minimize the impact on your CIBIL score.

Tips to Improve Your CIBIL Score

There are many things that can help an individual to improve their credit score. Some of them are: -

Make timely payments: The payment history of an individual plays a significant role in the CIBIL score. So, to improve it, make sure you pay all your bills and EMIs on time.

• Reduce credit utilization: Ensure to keep your credit utilization ratio below 30%. If you have a high credit balance, try to pay it off as soon as possible.

• Limit credit applications: Only apply for credit or loan when you need it, and avoid making multiple applications within a short period.

• Monitor your credit report: Ensure to check your credit report for any errors or discrepancies from time to time and raise disputes if necessary.

• Develop good credit habits: To maintain a healthy CIBIL score, make sure you practice responsible credit habits like keeping track of your expenses, paying bills on time, and not relying on loans or credits.

The Bottom Line

The CIBIL score of an individual is an important factor that can affect your financial health. A dropping CIBIL score may indicate that you are facing some financial challenges and need to take corrective actions.

By understanding the reasons behind a dropping CIBIL score and taking necessary measures to improve it, you can ensure that your creditworthiness remains intact. Lastly, remember to be patient, as improving a CIBIL score takes time and consistent effort. So, make sure you stay financially responsible and keep a check on your credit report regularly to maintain a good CIBIL score.
 

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Frequently Asked Questions

A credit score is a generic term encompassing various scoring models used globally. In contrast, a CIBIL score specifically refers to the credit score provided by the Credit Information Bureau (India) Limited. So, while all CIBIL scores are credit scores, not all credit scores are CIBIL scores.

Late payments, high credit card balances, frequent credit applications, and financial setbacks are major culprits that help in lowering dow the CIBIL score. Apart from that, missing payment deadlines, exceeding credit limits, applying for credit frequently, and facing unexpected financial challenges can collectively trigger a downturn in your score.

The CIBIL score is an essential factor that banks or various financial instituions consider when assessing an individual creditworthiness. However, it is not the only factor that is taken into account while offering a loan or credit. Some of the other factors, such as your income, employment status, debt-to-income ratio, and credit history, are also considered. This means a CIBIL score can increase the chances of getting a loan but doesn’t guarantee your loan will be approved.