Paying EMIs On Time But Credit Score Still Falling? 4 Reasons You Should Know
Paying your loan EMIs and credit card bills on time is an important part of maintaining a healthy credit profile. But timely payments alone do not guarantee that your credit score will always rise. Sometimes, your score may remain unchanged or even fall despite having no missed payments.
Credit card usage, multiple loan applications , closing an old credit card and errors in your credit report can all affect your credit profile. Understanding these reasons can help you identify what may be affecting your score and take suitable steps.
For example, if your credit card limit is ₹1 lakh and you regularly use ₹70,000, your credit utilisation is 70%. This means you are using a large portion of your available credit.
A high credit utilisation ratio can negatively affect your credit score, even if you pay the entire bill on time.
Many financial experts suggest keeping credit utilisation below 30%. However, this is a general guideline, not a fixed threshold above which your score will automatically fall.
If possible, avoid using a large portion of your credit limit regularly. Paying your outstanding balance and managing spending responsibly can help maintain a healthier credit profile.
When you apply for credit, the lender generally checks your credit report. This is known as a hard inquiry.
A single hard inquiry usually has a limited impact. However, several applications within a short period can indicate that you are actively seeking more credit. This may affect how lenders view your credit profile and can sometimes lower your score.
For instance, applying for three credit cards and two personal loans within a few weeks may result in multiple hard inquiries.
Before applying, compare the available options and apply only when you genuinely need additional credit. Checking your own credit report does not generally create the same kind of hard inquiry.
Suppose you have two credit cards:
This happens because the closed card's credit limit is no longer available for your current utilisation calculation.
An old card with a good repayment history may also contribute to your credit history. Closing it could therefore affect your credit profile, depending on how the credit bureau treats the account and your overall credit history.
However, keeping every old card is not necessary. If a card has high annual fees or offers little value, closing it may make sense.
Before making a decision, consider the card's age, credit limit, repayment record, fees and benefits. You can also ask the issuer whether a fee-free alternative is available.
For example, your report may show:
If your score drops unexpectedly, check your credit report carefully. Look for unknown accounts, incorrect payment records and changes in outstanding balances.
If you find an error, raise a dispute with the concerned credit bureau and contact the lender that supplied the information. Keep payment receipts and other supporting documents ready.
Here are some useful steps:
If your score is falling despite timely payments, reviewing these four areas may help you understand what is happening and identify the next steps.
Disclaimer:This article is for general informational purposes only. Credit score factors and their impact may vary by credit bureau and individual profile. NewsPoint does not verify or claim that the information applies to every borrower. Credit rules may change, so consult a qualified financial advisor for personalised guidance.
Credit card usage, multiple loan applications , closing an old credit card and errors in your credit report can all affect your credit profile. Understanding these reasons can help you identify what may be affecting your score and take suitable steps.
1. Your Credit Card Spending May Be Too High
Your credit card limit is not just the maximum amount you can spend. How much of that limit you use also matters when lenders assess your credit profile.For example, if your credit card limit is ₹1 lakh and you regularly use ₹70,000, your credit utilisation is 70%. This means you are using a large portion of your available credit.
A high credit utilisation ratio can negatively affect your credit score, even if you pay the entire bill on time.
Many financial experts suggest keeping credit utilisation below 30%. However, this is a general guideline, not a fixed threshold above which your score will automatically fall.
If possible, avoid using a large portion of your credit limit regularly. Paying your outstanding balance and managing spending responsibly can help maintain a healthier credit profile.
2. You Have Applied For Too Many Loans Or Credit Cards
Planning to take a new loan or credit card? Applying for several options within a short period may affect your credit score.When you apply for credit, the lender generally checks your credit report. This is known as a hard inquiry.
A single hard inquiry usually has a limited impact. However, several applications within a short period can indicate that you are actively seeking more credit. This may affect how lenders view your credit profile and can sometimes lower your score.
For instance, applying for three credit cards and two personal loans within a few weeks may result in multiple hard inquiries.
Before applying, compare the available options and apply only when you genuinely need additional credit. Checking your own credit report does not generally create the same kind of hard inquiry.
3. Closing An Old Credit Card Can Change Your Credit Profile
Many people close old credit cards that they no longer use. While this may reduce unused accounts, it can also affect your credit profile.Suppose you have two credit cards:
- Card A: ₹1 lakh limit
- Card B: ₹50,000 limit
This happens because the closed card's credit limit is no longer available for your current utilisation calculation.
An old card with a good repayment history may also contribute to your credit history. Closing it could therefore affect your credit profile, depending on how the credit bureau treats the account and your overall credit history.
However, keeping every old card is not necessary. If a card has high annual fees or offers little value, closing it may make sense.
Before making a decision, consider the card's age, credit limit, repayment record, fees and benefits. You can also ask the issuer whether a fee-free alternative is available.
4. Errors In Your Credit Report Could Be Affecting Your Score
Sometimes, a falling credit score may not be due to your financial behaviour at all. Mistakes in your credit report can also affect your credit profile.For example, your report may show:
- An EMI marked as unpaid even though you paid it on time.
- An outstanding loan that you never took.
- An incorrect credit card balance.
- A payment delay that does not belong to you.
If your score drops unexpectedly, check your credit report carefully. Look for unknown accounts, incorrect payment records and changes in outstanding balances.
If you find an error, raise a dispute with the concerned credit bureau and contact the lender that supplied the information. Keep payment receipts and other supporting documents ready.
What Should You Do If Your Credit Score Drops?
A lower credit score does not always mean that you have missed an EMI. Instead of assuming the worst, review your credit profile and look for possible reasons.Here are some useful steps:
- Check your credit report regularly.
- Keep credit card utilisation under control.
- Avoid applying for multiple loans or cards unnecessarily.
- Review your old credit cards before closing them.
- Report incorrect information to the lender and credit bureau.
If your score is falling despite timely payments, reviewing these four areas may help you understand what is happening and identify the next steps.
Disclaimer:This article is for general informational purposes only. Credit score factors and their impact may vary by credit bureau and individual profile. NewsPoint does not verify or claim that the information applies to every borrower. Credit rules may change, so consult a qualified financial advisor for personalised guidance.
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