A credit score/CIBIL Score is a numeric score which depicts the creditworthiness of an individual based on his/ her credit history. Credit score is used by lenders in making lending decisions on a particular borrow request by assessing the repayment history of the borrower. CIBIL is one of the credit bureaus that prepare credit reports. CIBIL score can range from 300 to 900. A person with a higher score is considered as more trustworthy, financially. So, when you apply for unsecured loans such as a small cash loan, personal loan, unsecured business loan, etc, a high credit score will help get the loan application approved.

Why should you check Your Credit Score?

  1. Check Outstanding Balance: By checking your credit score you get to know all your outstanding credit at one place. You can check the outstanding balance of your credit accounts, loans, credit cards and mortgages in a single document. Through credit score, you come to know the value you owe at different places. You need not to check different bills and statements to know your various finances.

  2. Best Credit Deal: If you know your credit score, you can apply for best suitable credit deals for you. When you know the information which is used by the lenders to come to a decision of lending, you can make sure to apply for the best product as per your suitability and you can get credit facilities matching your credit rating/ score.

  3. Improve Credit Score: In case your credit history is not so good, you can improve it by knowing the constituents of your bad credit score which can be known only by deriving a credit score. You can alert yourself and further improve your credit score by working on past mistakes which made your score bad.

  4. Keep a Track of Lenders: Your credit history constitutes the list of the various lenders to whom you owe money. This list can be helpful for you in order to stay in touch with them. The report has a record of your various applications to different lenders (whether approved or not). Through this you can make sure that you don’t apply to the same lender who has already rejected your application earlier.

  5. Personal Records: Your credit report includes a record of your past addresses i.e. the places you’ve lived in the past which can help you in many situations such as applying for a new job or availing a fresh credit facility.

  6. Notice Fraudulent Queries: By analyzing your credit score report, you can come to know the various circumstances when you have applied for a loan. This may help you notice any fraudulent credit query done on your behalf. In such a case, you can contact the lender and get the same rectified. You can safeguard yourself from identity fraud when you check CIBIL Score regularly. In case there is any suspicious/ unfamiliar credit application in your credit score, you can report the same to the relevant authorities so that it can be dealt accordingly.

  7. Fix Errors in the Credit Report: In case there are mistakes in your credit score report, you can contact the relevant lender and get it rectified at the earliest. This is necessary so that the mistakes do not show on your credit report the next time. In certain cases, you can add an explanation note also in order to convince the borrower for a specific point. There is no harm in checking your credit score as it does not affect your credit score.

What Lowers Your CIBIL Score?

By monitoring your CIBIL Score from time to time or signing up for credit score alerts, you come to know the fluctuation of your credit score over a period of time. Here are a few possible reasons your credit score could drop:

  1. You delay payments by more than 30 days

Your payment history has a significant impact on your credit rating/ score. Your installments/ payments (loan or credit card) falling due for more than 30 days are reported invariably to credit information companies and are further reflected in your credit report. Such delayed payments may result in dropping your credit score.

  1. Big-Ticket Purchase

A big purchase from your credit card may affect your credit score negatively even if you pay the full balance well in time. It is considered a crucial factor by the credit information companies that how much portion of your credit limit is being used at a particular point of time. This is basically due to the reason that credit card issuers report the balance to the credit bureaus on the last day of the billing cycle and not the due date. In such cases, you can pay the balance back to the card issuer and avoid making more transactions from the card.

  1. Skipped Payments

When you pay your credit cards and loans well in time but skip paying your other accounts (non credit) such as telephone/ mobile bills, it is considered as a default. In some cases, the concerned institution may send the balance to a collection agency, which may be reflected in your credit score. In this way your credit score can be hampered.

  1. Too Many New Loans Applied For

Every time you apply for a fresh credit facility, the information related to your enquiry is transmitted to credit information companies like CIBIL and hence are recorded by them. Now, since the number of inquiries constitutes 10% of your credit score, an effect is made to your credit score when you apply for a fresh loan. Further, it is important to know that these enquiries have an effect over your credit score for a period of only 12 months; hence your score may increase if you have only one inquiry in the past 12 months.

  1. Credit Limit Lowered

In case your credit limit is lowered, the portion of credit facility used goes up (in percentage or ratio) which may have a negative impact on your score. Hence, you may consider lowering your used credit limit with a fall in overall limit.

  1. Closed or Cancelled Credit Card

Closing a credit card hampers your credit score especially in cases when the card has balance. Sometimes the card issuer can also cancel your card which will also have a negative impact on your credit score.

To Conclude

Your credit score tells about your creditworthiness. Banks and NBFCs prefer a person of high creditworthiness to provide loans, especially unsecured loans. Thus, you must keep a check on your credit score and credit report in a timely manner. You must follow financial habits that will boost your CIBIL score. If the CIBIL score weakens, then work soon on bringing it up to a desirable score.

Author's Bio: 

I, a Sonal Mathur a freelance financial advisor and strategist with 6+ years experience. I am passionate about sharing knowledge through blog posts and has been writing on finance past, 5+ years.