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Top 5 Factors You Didn’t Know Could Affect Your Credit Score Negatively

Good scored and bad scores are not only just terms used to describe some school grade cards but also define your credit scores. As a borrower, you must be aware of how credit scores are calculated and what factors affect your score. Your CIBIL score is affected by numerous factors which directly influence your day-to-day finances. While most people know the importance of good credit scores many are not even aware of the factors that affect these scores.

The not so evident factors that can potentially mess up with your credit scores are:

  1. A high Credit Utilization Ratio: The credit utilization ratio is the percentage of a borrower’s total available credit that is currently being utilized.

Credit Utilization ratio = (Total outstanding credit/Total credit Limit) *100

For example: You have a credit card with a limit of 1lakh rupees and the outstanding credit on the card is of Rs. 50000. So now, your

Credit Utilization Ratio = (50000/100000) * 100 = 50% which means you are currently using half of the total credit limit available to you. Different credit agencies have a different cut-off ratios, but it is usually recommended to have a total credit utilization ratio below or equal to 30%.

  1. Making multiple credit inquiries: A hard inquiry is done by the lenders whenever you apply for a credit card or a loan. When you make multiple requests for the same it reflects on your credit report or CIBIL score and then negatively affects your CIBIL score because lenders then judge your credit worthiness based on the hunger or desperation you have shown towards getting a loan or credit card.
  2. Not having a Credit Mix: There are 2 types of credit – Secured and Unsecured credit or loan. As a borrower, you should have a mix of both types of credits because it increases the confidence of the lender as it assures them that you have successful experience in handling both types of credit and their payments. Credit card loans are usually unsecured credit and auto loans, or home loans are secured type of credit.
  3. Unpaid Dues: A credit report reflects all your credit history including repayment history, any outstanding payments, overdue or any default in payments. It is advised that you should always clear your unpaid dues, even if it is a small amount. Having an unpaid due will negatively impact CIBIL scores.

Applying for too many credit cards at once: Applying for too many credit cards in a short period can drastically lower your credit score as it would reduce the length of credit history, plus it would add to many inquiries at once to your credit report alarming lenders about your desperation of availing credit.

–  Muskaan Singh

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