Avoid these 7 mistakes to protect your Cibil score and secure loans
Cibil Score: Many people often overlook the importance of their Cibil score. However, they may not realize that their credit score can significantly impact their financial future. Wondering how? A poor credit rating makes it difficult to secure loans from banks and NBFCs, and in some cases, it can even lead to loan rejections. From missing EMIs to prepaying loans, here are 7 mistakes that can hurt your Cibil score and hinder your ability to secure loans.
What is Cibil Score?
Your Cibil score is a 3-digit number that summarises your credit history, rating, and report, ranging from 300 to 900. The closer your score is to 900, the better your credit rating.
Missing EMIs
Missing any EMI (Equated Monthly Installment) on an existing loan directly affects your Cibil score. Defaulting on multiple EMIs or loans could make your credit score so poor that no bank will approve your loan.
Taking Large Loans
Taking on a significant loan increases your debt burden, which can lower your Cibil score. A high loan amount signals to banks that you may struggle to repay, making them hesitant to offer more credit.
Frequent Loan Applications
Applying for loans at multiple banks in a short period results in multiple "hard inquiries" into your Cibil score, which can lower it. Only apply for loans when absolutely necessary.
What is a hard inquiry?
When a bank or NBFC checks your credit score, it is called a hard inquiry. On the other hand, when you check your Cibil score online yourself, it is called a soft inquiry. Hard inquiries can cause your Cibil score to decrease.
Excessive Credit Card Spending
Making large or frequent purchases on your credit card raises your credit utilisation ratio, which can negatively affect your Cibil score. Try to use no more than 30 per cent of your credit limit to maintain a healthy score.
Multiple Credit Card Inquiries
Repeatedly applying for credit cards triggers hard inquiries, which can reduce your Cibil score. Although the impact is temporary, it's still best to avoid frequent credit card applications.
Closing Credit Cards
Closing a credit card decreases your total available credit limit, raising your credit utilisation ratio. A higher ratio can hurt your Cibil score, so avoid closing cards unless necessary.
Prepaying Loans
Prepaying a loan early can affect your Cibil score, especially if it's a secured loan. Though the impact is usually short-term, it could slightly lower your score until it stabilises.
Two types of Loan
Banks offer two types of loans: secured and unsecured. A secured loan requires borrowers to provide collateral as security, while an unsecured loan does not require any collateral.