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Why did my Credit Score Drop when I Paid off a Loan

Why did my Credit Score Drop when I Paid off a Loan

Paying off EMIs every month is a relief as you feel financially lighter when the loan ending tenure is near. There are times when making repayments on time can increase your credit score or show no change at all. But if the credit score drops even after being a punctual EMI payer then you definitely need clarity on this. Know about factors responsible to drop your credit score:
 
  • Track Credit Report Errors: Get a free credit report from financial websites, credit bureaus and credit card companies. Check for the personal information, linked accounts and incorrect/negative information, if any. In case any errors are spotted, do raise a dispute with supporting copies. 
 
  • Multiple Active Loans: Sometimes there are recurring events in our lives that demand finances in bulk. This triggers borrowers to apply for more than one loan at a time which becomes difficult to repay and later affects the credit score.
 
  • Closing the Credit Accounts: It is good to hold accounts active even after the completion of loan EMIs. This increases the age of accounts which otherwise affects the credit score negatively if closed. Once you close your old credit cards/accounts, you might end up losing a long credit history linked with it.
 
  • Missed Payments for More than 30 days: You have planned your EMIs well in advance but what if you forget the EMI payment date and it exceeds 30 days grace period. This causes delay without any reason and drops the credit score.
 
  • High Credit Utilization: If you exceed the set credit limit as compared to how much credit you have; it can incur a penalty charge and a decrease the credit score. Using 20% less of your total credit limit is advisable to retain the credit score.
 
  • Prioritize Old Debt: Repay your old debts before applying for new loans. The interest and number of loans will keep piling up that will directly affect the credit score.
 
  • Avoid Joint applicants: This kind of situation can bring down your credit score, If the joint applicant has not paid the dues on time it will affect the CIBIL score of the second applicant too. Go for independent loans for maximum benefits.
 
A drop in credit score is scrutinized by the credit information agencies such as CIBIL (Credit information Bureau (India) Limited). The agency is engaged in maintaining and analysing the records of credit related activities for corporates as well as individuals. As per CIBIL guidelines, a month’s negligence in your personal loan payment can reduce your credit score.

Unnecessary errors made in the credit report are waved off in seven years. So, the best thing is to organize your finances in those years and try to improve the credit score organically. A debt consolidation loan can reduce credit utilization and improve your credit history.

It is necessary to maintain a healthy balance of secured and unsecured loans. Home loans and personal loans are few examples of secured and unsecured loans respectively. If you procure only one type of credit, it can affect your credit score.
 

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