Irrespective of how good you manage your financials, sometimes your loan application might be declined or approved with higher rate of interest. A bad credit score can be one of the reasons behind it. It need not necessarily be a missed out/delayed loan EMI for a bad credit score, it can be various reasons including late payment of credit card bill, PAN mismatch & wrong entry by lender with hard inquiries etc. Below we will discuss more in detail about reasons for bad credit score
Higher Credit Utilization Ratio: Credit Utilization ratio is one of the main components of a credit score. Your earlier score would have been calculated as per your existing credit utilization ratio. However, if there has been a consistent increase in your credit utilization ratio your credit score would have dropped down. Higher utilization is an indicator of poor credit habits.
Missed a Repayment: Credit scores are all about how efficiently you manage your existing credit. Repayments of loans are the cornerstones of good credit behavior and missing a couple of them will have a negative bearing on your credit score. It is quite common that we end up missing a due date. In such cases, it is good to inform your lender immediately that you have missed the due date and immediately pay up the missed EMI with penalties if any. This would do some damage control than totally missing the repayment.
Looking for a Lot of Credit: When you apply for credit the lender will pull your credit score. Due to this there will be a slight drop in the score. If you apply for credit with multiple lenders they will all check your credit score and the drop-in score will be very high.
Availed New Loans: Availing new loans or frequent loans over a small period of time will show an individual as a credit hungry person. Consequently, there is bound to be a drop-in credit score.
Errors in the Credit Score: There are some factors that affect your credit score which is beyond your control, like errors in the credit score. These errors may be due to wrong reporting from your lender’s end. All lenders report information related to repayment, opening, and closure of credit account to the credit bureaus. A small error like using the term “Settled” instead of ” Closed” brings a drop in your credit score. Missing a repayment can also have a similar effect.
There might also have been cases where your PAN was used for some other loan applications resulting in hard inquiries. The PAN mismatches might have been intentional or due to oversight.
The only way anyone can prevent a drop-in credit score is by regularly checking your credit scores. So there is always enough time to take corrective action if there is a drop in credit score so that you can be creditworthy at all times.