Mr. Krishna Kumar was sure his daughter Riya deserved nothing but the best. For her sixteenth birthday, he decided the latest iPhone replete with accessories is what he would gift her. Since there was still time for him to receive his salary, he applied for a personal loan. But his loan application was denied due to low CIBIL score. All he wanted was to see his daughter happy. Was he asking for a lot?
It would be wrong to say that a person with a low score has no place in a bank seeking more funds. There are several reasons because of which one’s score could be low. However, that does not mean there is no hope for them. What is essential is to make changes and lose a few habits to improve creditworthiness.
Reasons for a Low Score
Lenders expect you to have a score of atleast 750 or more to be eligible for a loan or credit card. For anyone below that and upto 650, the lenders become slightly concerned and scrutinise deeper into credit history. Banks may not offer unsecured loans to them but may be secured loans at a higher rate of interest for the risk posed by the borrower.
For those who are struggling with a score far below 600, loans seem like a distant dream. NBFCs, however, do actively give loans for low CIBIL score albeit at a higher rate of interest than banks. Some of the main reasons for a low score are:
- Missed or Delayed Payments: This makes up for most of the score. If you happen to miss the payments frequently, then you are bound to have a poor score.
- A disproportionate mix of unsecured loans and secured loans. More secured loans means higher score, while a higher proportion of unsecured loans in a debt portfolio would lead to a low CIBIL score.
- Too many and too frequent lender inquiries of the credit report indicates that the borrower often seeks debt and is over dependent upon borrowed funds. This kind of behaviour leads the score to decline.
- Depend too much on credit by using a lot of the credit limit.
Habits That You Must Do Away With
- Lose your nonchalant and casual attitude towards finances. Treat debt accounts and credit cards with respect. Mr. Kumar had a very indifferent attitude towards his repayments. It is nice to not be stressed but that is no reason to not be serious about some things in life. There was hardly a line of care if he missed a payment. He thought its ok for as long as he pays his late fees and never made a fuss about it, he would be treated differently by the bank. It is important to give merit to your creditors and give them utmost importance.
- Some people would not touch a credit card even with a ten foot barge pole. That sort of attitude will never help build a strong credit score. You cannot expect to have a good credit background when all you do is run away from it. If you wish to build an enviable credit score then don’t alienate yourself from various types of credit facilities available today.
- Curb your temptations to spend unnecessarily. Use money only for what you need and borrow an amount what you can repay in future. It is not mandatory for everyone to be a financial guru. Mr. Kumar hardly consulted a financial expert to seek guidance on various financial aspects. Given the flood of choices in the market today, we all are faced with the urge to spend and purchase more. However, only those who prioritise and streamline their expenses are able to keep their head above water.
- Don’t be influenced by social pressures and those who flaunt. Mr. Kumar would often exceed his means only to exhibit a higher purchasing power. This way he would always carry a higher balance on his credit card. Owing to his wasteful habits, coupled with delayed payments it resulted in a double whammy to his credit score leading to a pitiable score.
- Avoid unnecessarily applying for loans and credit cards. Instead create an emergency fund and try to use savings for smaller expenses. Understand the importance of a savings pool which you can withdraw from when in need. Mr. Kumar was oblivious to the fact that every time he applies for a loan there is a hard inquiry into his credit report which affects his credit score negatively. He assumed he should be treated royally by the bank for he was a dedicated client bringing in business every now and then. If you keep running back to the bank for small personal loans you display your over dependence on credit and this puts them off.
Remember the reins of a bright financial future are in your hands. How you steer it is upto you.