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Five red flags that could lead to a drop in CIBIL Credit Scores

CIBIL credit score is a means for the lender to figure out the risk he is taking while lending to a particular person it also helps the lender determine the lending rate. The greater the perceived risk (a lower CIBIL Credit Score) the higher the rate of interest set by the lender and vice versa.

February 04, 2014 10:48 IST | India Infoline News Service
CIBIL rating or a CIBIL credit score becomes extremely important for both the lender and the borrower. As we all know prevention is better than cure – this hold true not only in medical issues but also in financial issues. If we knew the red flags that can bring down the Cibilcredit score, we could act quickly and prevent the fall.

Using a high percentage of credit limit on your credit card
Each credit card that you hold has an upper spending limit that is set by the card issuing bank. The sum of these limits adds up to the total credit limit of your credit cards. Ideally you should not be using more than 30% of this credit limit. A higher usage brings down your credit score. Besides showing in the credit report a high credit usage 60% or higher is a reminder that you need to monitor your expenses to avoid slipping into the vortex of debt.

Taking a personal loan to pay off a housing loan EMI
With the prices of reality touching sky high, the EMI on mortgage loans takes up a huge chunk of the monthly disposable income. It is no surprises that many of us end up scrambling to make these payments. However if you are taking a personal loan or a loan against gold another security to pay you home loan EMI you need to take this as bright red flag to alert you that you need to get your finances under control. While you might be able to meet a few EMIs this way ultimately you will fall behind payments affecting your CIBIL credit report and CIBIL credit score.

Tapping into “goal” funds
Each of us have dreams for the future and we start planning for the future by saving for these goals, the goals might include a child’s education, a secure retirement etc. A steady monthly saving is one of the best ways to reach these goals. However if you are tapping into these savings to meet a current expense it should alert you that you are on the wrong road.

Your credit score is low and falling
Your credit score is an indicator of your financial health. If your credit score is below 700 and has been on the decline for the last few months, it should be a wake-up call for you to make corrections in your spending and payments. A strong credit score is essential for being considered a good credit risk for banks to lend to you at a favourable rate.

Bouncing your cheques
If you are routinely overdrawing your bank account or bouncing checks, then you are most likely either very poorly managing your finances or in serious debt. While bouncing checks does not directly show up on your credit report, higher utilization of your accounts will have negative impact on your Cibilcredit score.
The author is Co-Founder & Director, CreditVidya 

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