Understanding the Enigma: Why Your CIBIL Score Is Falling Despite Timely Credit Card Payments
Introduction : The Myth of On-Time Payments
We often pride ourselves on financial diligence, thinking that punctuality in credit card payments is the surefire route to an impeccable CIBIL score. However, this perception is a misleading facade. A variety of factors, often overlooked, contribute to the slide in your credit score. Here, we unravel these complexities and offer actionable insights to protect your financial credibility.
Credit Utilization Ratio: The Hidden Culprit
What It Is: Most people are unaware of the term Credit Utilization Ratio (CUR), a crucial metric that influences your CIBIL score. This ratio represents the amount of available credit you are using, divided by your total credit limit.
Impact on CIBIL Score: A high CUR can be an insidious cause behind a falling CIBIL score. Financial experts recommend keeping your CUR below 30%. If your credit limit is Rs 1 lakh, aim to spend no more than Rs 30,000. Exceeding this limit can flag you as a high-risk borrower, negatively affecting your credit score.
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Reduced Credit Limit: An Unwanted Change
What Happens: Banks may occasionally reduce your credit limit based on your spending habits or their internal policies.
Consequences: A reduction in credit limit automatically inflates your CUR, assuming your spending remains constant. This sudden change can send your CIBIL score plummeting, often without you even realizing it.
Frequent Loan Applications: A Red Flag for Lenders
Why It Matters: Multiple loan or credit card applications within a short time frame can set off alarms for banks.
Impact on Credit Score: Each application results in a hard inquiry on your credit report, lowering your CIBIL score incrementally. Banks may interpret this behavior as financial desperation, reducing your score further.
Closing Credit Cards: A Double-Edged Sword
The Misconception: People often close unused credit cards, thinking it’s a responsible financial move.
Reality Check: Closing a credit card decreases your overall credit limit, thereby increasing your CUR and lowering your CIBIL score. The age of your credit accounts also contributes to your score; closing an older account can have a more significant impact.
Joint Loan Accounts: Shared Responsibility, Individual Consequences
The Common Scenario: Couples or business partners frequently opt for joint loans to share financial burdens.
Impact on CIBIL Score: If your joint account partner defaults on payments, it adversely affects your score. The responsibility is mutual, but the consequences are individual.
Conclusion: Holistic Financial Awareness
While timely payments are essential, they are far from the only factor affecting your CIBIL score. A nuanced understanding of credit utilization, changes in credit limits, frequency of loan applications, the implications of closing credit cards, and the risks associated with joint loan accounts can offer a more complete picture. Being aware of these factors and managing them strategically is key to maintaining a robust CIBIL score.
