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What factors pull down my credit score?

Pradeep and Mithi Kakkar have lived in rented apartments for the past 10 years in the city of Mumbai. The couple has saved up enough money for the downpayment for a two bedroom flat in Dombivli, a far flung suburb in Mumbai. They are under the impression that just having enough money for a down payment will qualify them for a home loan they intend to take shortly.

But all their dreams may just come to a naught from what Pradeep recently heard from his boss about a poor credit score. What the Kakkars’ did not know is that a poor CIBIL credit score can be the cause of a bank rejecting a home loan application altogether. The Kakkars’ like any other upwardly mobile couple in Mumbai have used credit cards and have missed a few bill payments too.

To avoid making a mistake like the Kakkar couple, here’s what you should know about what is responsible for pulling down your credit score-

  1. Late and untimely payments- Donot delay your loan and credit card payments. If you do, it shows as an overdue (Days Past due – DPD) in your credit report and every late payment shaves off around 50-70 points of your credit score. Any bank would hate to see that you are a habitual late payer on your credit card bills and EMIs. This gives them the impression that you are a high risk customer.
  2. Utilization on your credit card- Plastic money has indeed made life incredibly simple, but make sure that you do not go overboard with your credit card spends. Ideally you should keep your card utilization under 30% of your credit limit.
  3. The minimum amount trap- Always spend on your credit card in a manner so that you can make your entire payments in full and do not get into the cycle of revolving credit. Not only do you end up paying extra on service charges and interest component, it does not flatter your credit score as well.
  4. Non closure of previous loans- Make sure you keep a record of the closures of all your past loan accounts. If you have paid all your dues, but haven’t received a ‘no-due certificate’ from your lender, it may show up as a live account on your credit report.
  5. Payment default- Any kind of payment defaults is taken very seriously and can impact your credit score for good. Be it any loan or credit card, make sure you keep enough resources aside to make your payments in full on time. A default on a loan can bring down your credit score by 150-200 points while credit card defaults may trim off 100 points on your credit score.
  6. An unhealthy mix of credit- While this is not the most important parameter that drives your credit score, having a good balance of secured and unsecured loans certainly has a positive impact on your credit score as opposed to having a lopsided credit profile with only one type of loan. Having a good mix of loans and servicing them properly gives the impression that you are financially responsible and credit worthy.
  7. Hard inquiries- If you have applied for too many loans or cards in a short period of time, it is highly likely that your score has gone down. Why? With each application you make, banks pull out your credit report. These report pulls done by the bank will be recorded as hard inquiries on your CIBIL report and will have a negative impact on your credit score. Every inquiry on your report costs you 5-10 points of your score.

Make sure you do not commit these mistakes, particularly if you are planning on a big purchase in the future like a home or a car.