Imagine this scenario: You have always been diligent about paying your bills and EMIs on time. You pride yourself on being financially responsible. However, despite your efforts, you notice your credit score is decreasing.
It can be disheartening to see your credit score go down. You may have been making timely payments. But why does this happen?
At Shriram Finance, we understand the importance of credit scores. We offer a range of credit solutions to help individuals with low credit scores. In this article, we will explore the factors that may cause a decline in your credit score. We will also learn how you can still be eligible for a loan despite having a low credit score.
Factors Affecting Credit Scores
You can have a credit score ranging from 300 to 850. Any credit score below 650 is considered a poor credit score. Any score above 650 is a high credit score and low-risk credit score. Credit bureaus consider several factors to determine your credit score. Let's discuss some of those factors causing your credit score to fall.
Payment History
A poor payment history is equivalent to a poor credit score. Payment history is a significant factor impacting your credit score. Late or missed payments can hurt your credit score. Make consistent and timely payments to maintain a good score. Even one missed payment can show up on your credit report and affect your score for quite some time.
High Utilisation of Credit Limit
Another factor contributing to a decline in your credit score is the high utilisation of your credit limit. Paying off bills on time is essential. However, exceeding the recommended 30% credit utilisation ratio can lower your credit score. Keep your credit card balances low and pay off debts regularly to improve your scores. You cannot get a credit card with a low credit score.
A Higher Percentage of Unsecured Loans
The types of loans also play a role in determining your credit score. A higher percentage of unsecured loans (like personal loans or secured credit cards), when compared to secured loans (such as auto or home loans), can negatively affect your credit score. It is crucial to strike the balance between secured and unsecured loans to maintain a healthy credit profile.
There aren't many low credit score lenders, as borrowers with low credit scores have a high chance of defaulting on repayments. Shriram Finance offers tailored loan options to assist individuals in improving their credit scores and meeting their financial needs.
Multiple Loans and Credit Cards
Having multiple loans or applying for multiple credits within a short period can indicate a higher risk to lenders. Each application leads to hard inquiries, which temporarily lower your credit score. It's best to thoroughly research and choose the most suitable product before applying for a loan or credit card. This will help avoid unnecessary hard inquiries and minimise the negative impact on your credit score.
How to be Eligible for a Loan Despite a Low Credit Score?
If you ask, 'My credit score is low. What do I do?' We have you covered. Although having a low credit score may make it challenging to obtain a loan, there are still ways to improve your eligibility:
1. Good and Stable Source of Income
A good and stable income demonstrates your ability to repay the loan, even with a low credit score. Providing proof of regular income, such as salary slips or tax returns, can significantly improve your chances of loan amount approval.
2. Timely Filing of Taxes
Being a regular taxpayer shows your sincerity and commitment towards financial responsibilities. Displaying tax receipts from the last 3 years can act as additional proof of repayment ability.
3. Secured Job with Better Career Prospects
Having job stability with growth opportunities can reassure lenders about your repayment abilities. If you have a secured government job or work for a reputable company, showcasing your salary slips from the past 6 months can strengthen your loan application.
4. Good Bank Balance
A healthy bank balance indicates financial stability, even in times of crisis. By providing bank statements from the last 6 months, you can demonstrate your seamless repayment ability and increase your chances of loan approval.
It takes 7 years on average for a poor credit rating to turn void and your credit scores to reset. So maintain a good bank balance and check your credit report frequently.
Conclusion
In conclusion, while a low credit score may initially seem discouraging, it is not the only factor lenders consider when determining loan eligibility. At Shriram Finance, we understand that everyone's financial situation is unique. We offer credit solutions that cater to individuals with average to good credit scores, helping them secure loans and work towards improving their financial well-being.
Remember to keep continuously checking your credit score, make timely payments, and keep a healthy credit mix to ensure a positive credit report. If you are looking for credit solutions tailored to your needs, Shriram Finance is here to assist you every step of the way.
Key Highlights
- A low credit score (below 650) can affect loan approval and result in higher interest rates.
- Factors leading to a low credit score include a high utilisation ratio, missed payments, excessive new applications, closing old accounts, reduced limits, and an unfavourable mix of credits.
- Regularly checking your credit bureau reports and taking corrective measures can help improve your credit score.
- Maintaining a good payment history, keeping credit utilisation low, and having a diverse credit mix helps in improving your credit score and loan eligibility.
Frequently Asked Questions
1. What is considered a low credit score?
A credit score below 650 is considered a bad credit score. A credit score within the range of 300-650 is poor and needs immediate attention.
2. How is a credit score calculated?
A credit score is a 3-digit number summarising an individual's creditworthiness and repayment capacity. It is calculated based on various factors such as payment history, credit utilisation ratio, length of credit history, types of credit used, and new credit applications.
3. What can lead to a low credit score?
Several factors can lead to a low credit score. Some of these factors are high credit utilisation, missed payments, applying for too many new credits in a short period, closing old accounts, reducing credit limits, and having an unfavourable credit mix.
4. Why is having a low credit score a concern?
Having a low credit score reduces the chances of getting approved for loans and other forms of credit. It also increases the likelihood of being charged higher interest rates by lenders. Lenders may limit access to financial opportunities in the future if you don't have the required credit score.
5. How can I check my credit score?
You can check your credit score by obtaining your credit report from authorised credit bureaus like CRIF High Mark, CIBIL™ or Experian. These bureaus provide online platforms where you can access your report and see your current credit score.
6. How can I improve my low credit score?
To improve your low credit score, focus on paying your bills on time, reducing your overall debt, keeping your credit utilisation ratio below 30%, avoiding applying for multiple new credits at once, maintaining old accounts in good standing, and diversifying the types of credits you use.
