When you apply for a loan or credit card, the lender checks your credit score and your detailed credit report. Your credit score is a summary of your credit behaviour in the past. If you have a good credit score, it implies that you have handled credit responsibly and have fewer chances of defaulting. Thus, the risk for the lender in approving your credit application is low. A low credit score implies completely opposite. It means you have not handled credit diligently in the past and have a severely damaged credit history. If your credit score is still falling and you are not aware of the reasons, you should read this article to understand how to find the flaw in your credit report and what actions are necessary to stop your credit score from falling further and start rebuilding it. Let us start with some of the most important reasons why your credit score may be falling:
- Default in Loan EMIs or Credit Card Bill Repayment
Any default in making timely payments every month has the potential to lower your credit score significantly. If you continue missing out on payments regularly, the credit bureau will mark your credit account as NPA after 90 days of non-payment of dues. This has a severe impact and it will dent your credit score very hard. When you check your detailed credit report, do check the DPD section of all credit accounts and see if you have defaulted or not. In case there is a default, make all repayments immediately. Once the dues are paid in full, your credit score will stop falling. Now make all repayments by the due date every month, and your credit score will start improving slowly and steadily. Be patient because your credit score will take time to improve.
- Too many Loan Applications in a Short Span
If you make a number of credit applications in a short span, lenders will see you as credit hungry. On every hard enquiry by a lender, the credit bureau reduces your credit score by some points. Too many applications in a short period of time will lower your credit score significantly. Instead of desperately applying for credit from multiple lenders, you should first carry out a deep research about the loan options available, which option suits you the best and which lender would approve your application without much difficulty. Choose the best option available and apply only for that loan.
- Look for Errors in your Credit Report
There can be instances where your credit report may contain errors. This can be due to a misreporting by a lender or a clerical error by the credit bureau. There can also be instances where a fraud was carried out in your name, and a loan or credit card was issued without your knowledge. This is mentioned in your credit report and may result in a severe decline in your credit score. In all such cases, you should report the issue immediately to the credit bureau and the lending institution. It may take up to 30 days for the bank and the bureau to investigate the case. In case the error is detected, it will be corrected in your credit report and a new report with a refreshed credit score will be issued to you by the credit bureau. In addition to these points, you should follow some important rules to safeguard your credit score from falling. Some of them are mentioned below:
- Keep your credit utilisation ratio low, preferably below 30%.
- Have a diverse mix of multiple credit products such as secured and unsecured credit. (However, no lender would deny you a loan only because you don’t have a good credit mix)
- Do not close your oldest active credit card as it may reduce your age of credit history and have some impact on your credit score.
- Do not carry out credit enquiries every now and then. It sets a wrong precedence in front of the lender and the credit bureau.
- Check your credit score and report from time to time, preferably every month, and see if there is any mistake or error in your report.
Following the suggestions mentioned above will help you improve your credit score. However, it is very important to understand that your credit score may fall immediately with just one default and it may take years to rebuild your score. So, you should adhere to a disciplined credit behaviour and improve your creditworthiness to be eligible for loans and credit cards in future.
