Did you apply for a credit card and it was declined because of a poor credit score? Else, you want to apply for a personal loan and realised that your credit score is too poor to make the cut.
If that is the case, be aware that you are not alone. There are a large number of users who face this problem of either poor credit score or a bad credit score.
There could be multiple reasons for this. Here we list out the key reasons for this.
I. Lack of financial literacy: Many people are unaware of how credit scores work, how they impact financial opportunities, or even that they exist. Some people have misconceptions that having no credit is good. This prevents individuals from actively building a credit history.
II. Low credit card and loan penetration :Most users still rely on cash or UPI for transactions, which do not make any contribution to credit history. Several first-time borrowers, therefore, find it hard to get a credit card or loan, leading to a limited credit history.
III. Poor repayment behaviour: Late payments or defaults on credit card bills and loan EMIs significantly lower credit scores. Many users pay only the minimum due amount, leading to high-interest accumulation and eventual financial distress.
IV. Over-leveraging and high credit utilisation: Using more than 30 per cent of the total available credit negatively affects credit scores. Many users tend to max out their credit cards or take multiple loans, thus damaging their creditworthiness.
V. Multiple loan applications in a short time: Applying for multiple credit cards or loans within a short period leads to hard inquiries, reducing credit scores. Most loan seekers realise that frequent rejections adversely impact their score.
VI. Inactive credit history: Many people don’t take loans or use credit cards at all, which results in no credit history, making it difficult to get credit when needed. Closing old credit accounts also erases long-term credit history, which impacts the score negatively.
VII. Errors may occur: There could be mistakes in your credit report such as outdated loan records, incorrect personal details, or fraudulent activity. This could lead to a poor credit score. Many users don’t check their credit reports regularly or dispute errors.
VIII. From friends and family: A number of people prefer borrowing from family or local money lenders rather than banks, which doesn’t contribute to a formal credit score.
How to improve credit score?
1. You are supposed to clear your credit card bills and EMIs on time.
2. It is important to keep credit utilisation below 30 per cent of total credit limit.
3. You must avoid frequent loan/credit card applications.
4. You are recommended to check credit reports regularly for errors.
5. You should use a credit card responsibly to build a strong credit history.
(Note: Raising a loan comes with its own risks. So, due caution is advised)
