why do you have a low CIBIL score? 5 reasons

the Credit Information Bureau of India Limited, or CIBIL, is India’s oldest Credit Information Company (CIC) or credit bureau. it collects and maintains a record of the financial transactions, like loans and credit card payments, for individuals and businesses. the information is then crunched using some advanced algorithms to generate a 3-digit number between 300 and 900, also called your CIBIL score.

what does a low CIBIL score signify?

the CIBIL score is a widely used credit scoring model by financial institutions in India. lenders use this figure to determine your creditworthiness, which helps them decide whether they should advance you any credit. 
typically, your CIBIL score ranges between 300 and 900. a score above 750 is considered good. a slightly lower score between 650 and 750 is regarded as decent, but applicants with a CIBIL score of less than 650 are less likely to have their loan or credit card applications approved. 

generally, a low CIBIL score can have the following implications: 

• your loan or credit card application can be rejected outrightly.
• you might have to provide additional documentation to prove your creditworthiness.
• even if your loan application goes through, you might be required to pay a higher rate of interest, as lenders may consider you a high-risk borrower owing to your low credit score.

5 common reasons for a low CIBIL score

your CIBIL score can be understood as a numeric summary of your financial behaviour, derived from a detailed report of all your financial transactions. lenders make use of this figure to determine your creditworthiness each time you apply for a loan or file a credit card application. 
various factors impact your credit score, including payment delays and missed repayments, high credit utilization ratio, and frequent credit inquiries. here are some common reasons for a low credit score:

1. irregular payments

when you take out a loan or borrow money from a credit institution, it is vital to make all your repayments on time. the failure to do so might not only result in high-interest rate penalties but also put a black spot on your credit report, which is certain to bring down your credit score for at least a couple of years.

2. missed bill payments

we all struggle to keep up with a hectic daily routine. amidst all the chaos, it’s easy to forget about your telephone or electricity bill unless you are informed of the long-term damage to your credit score. most credit reporting agencies keep track of your utility payments, and the failure to pay any of your bills is noted on your credit report, impacting your credit score adversely. 

to avoid this from happening, you may activate the auto-debit facility for your recurring bills to ensure your payments are made on time. plus, you can consider using apps like CRED that reward you for timely payments.

3. no credit history

it might sound confusing, but you need to have a credit history to get credit. so, if you never had a credit card or any utilities like a telephone connection in your name, you may not have a credit history. this also means that you won’t have a credit score, or your credit score will be low if you recently started building your credit. 

to get over this hurdle, consider applying for a secondary card with someone who has a high credit score, like either of your parents or spouse. this is a great way to start building your credit history while also taking advantage of their high score.

4. high exposure to unsecured debt

a significant amount of unsecured debt outstanding on your credit cards or in the form of personal loans is not good news. it can lower your credit score by indicating poor financial management. ideally, you must maintain a low debt to income ratio and balance your debts by accessing a mix of secured and unsecured loans. 

5. multiple credit enquiries

be careful with your loan applications. the lender pulls out your credit report, also known as a hard inquiry, each time you seek a loan approval. these hard inquiries are reported on your credit file and lower your credit score if multiple inquiries are made in a short timeframe. 
therefore, you must always avoid applying for numerous debts simultaneously, as it can impact your credit score adversely. even if you do get approved for multiple debts, it may put additional pressure on your repayment capacity, which will once again reduce your credit score if you fail to make the repayments on time.

practical tips for improving your credit score

developing financial responsibility isn’t something that can happen overnight. however, if you want to avoid a low CIBIL score, following these tips can set you in the right direction.

• make sure that you pay your credit card dues on time and in full to maintain a high credit score. if you do this responsibly every month, you’d most likely be able to improve your credit score soon.
• put your utility payments on auto-debit so that you never miss out on paying a bill.
• a good way to improve your credit score is maintaining a credit utilization ratio of less than 30 per cent. this means you should only utilize 30 per cent or lower of your available credit limit, which indicates lesser dependence on credit and demonstrates good financial behaviour.
• unsecured debt can hit your credit score adversely, which is why a mix of secured credit (like home and car loans) and unsecured credit is preferable.

the bottom line

your credit score is an important figure in your life, and you must know where you stand before you apply for new credit. you can check your credit score online by submitting a few personal details. it is also possible to access a free copy of your credit report to figure out what’s pulling down your credit score.
if you find any incorrect information or discrepancies, you should report them immediately using the consumer dispute resolution mechanism and have your credit report rectified as soon as possible.