How Late Personal Loan Payments Impact Your CIBIL Score

What is a Late Payment? 

When you borrow a personal loan from a bank or Non-Banking Financial Company (NBFC), a date is typically set by the lenders by which you must repay your dues or loan Equated Monthly Installments (EMIs). If you miss the set deadline, the payment done post the given date is called ‘Late Payment’. 

All the payments missed or delayed beyond the given date are reported to CIBIL as late payments, and this can immediately lower your credit score. Even with improved financial habits and consistency, it will take time to rebuild your credit score. A low CIBIL score will make it harder for you to get loan approval next time.  

How do Late Payments Affect CIBIL Score? 

Your loan repayment history approximately contributes up to 35% of your CIBIL score. That is why it is important to ensure that you do not miss payment on any of your loan accounts. The below-listed are some of the ways late payments of personal loan affects CIBIL score: 

1. Drop in Credit Score: Missing a payment is immediately reported to the credit bureau and can cause a drop of 50 to100 points in CIBIL score, depending on the duration of delay and your repayment history. 

1. Stays on your Credit Report: The late payment entry does not get erased even after you settle your dues and stays on your credit report for up to seven years. This eventually affects your credit profile during that period and makes it difficult for you to get loan approvals. 

1. Slow Recovery: A late payment once reported has a lasting impact on your CIBIL score. Even if you are consistent towards your loan repayment after missing one payment, it would take a considerable amount of time to get your credit score back on track. 

1. Negative Impact on the Credit Profile: The late payment entries on your credit report project you as financial irresponsible in the eyes of the lender. This negatively affects your credit profile. 

1. Severity of Impact: The longer the delay and the more frequently payments are missed, the greater the negative impact on your CIBIL score. Extended delays and repeated defaults signal higher risk to lenders and can cause a significant drop in your credit score. 

Ways to Improve CIBIL Score: 

The below-listed are some of the ways to improve your CIBIL score: 

1. Repay your Bills on Time: Repaying your bills on time is one of the simplest and most effective ways to rebuild your credit score. Ensure that you always pay your loan EMIs and credit card bills before the due date to build a positive credit history. 

1. Keep your credit-utilisation ratio low: Try to keep your credit utilisation ratio below 30% to avoid any negative effects on your credit score. Having a high credit utlisation ratio projects you as credit-hungry and has a negative effect on your credit score. 

1. Do not apply for multiple loans simultaneously: Applying for multiple loans at the same time results in hard inquiries, which affects your credit score negatively. It is advisable to avoid applying for multiple loans simultaneously. 

1. Maintain a healthy credit mix: Having a balanced mix of secured as well as unsecured credit in the portfolio has a positive impact on your credit score. Home loans and auto loans are examples of secured credit, while in most cases, personal loans and credit cards are examples of unsecured loans.  

1. Avoid closing old credit accounts: The length of your credit history has a direct impact on your credit score. That is why it is advisable to avoid closing old credit accounts, especially the ones with a timely repayment history.  

1. Increase your credit limit: You can request your credit card provider to increase your credit limit and use only a portion of it. This will help you reduce your utilization ratio and boost your score. However, in such cases, it is important to ensure timely repayment and check that it does not have any negative impact. 

1. Set payment reminders: By setting payment reminders or giving instructions for auto-payment, you have to worry about missing deadlines. This way, your credit card bills will be cleared before the deadline every single time. 

1. Keep a check on credit report: At times, there are errors on your credit report which negatively affects your credit score. It is important to keep a check on your credit report and if you spot any error, get it rectified immediately to avoid any negative consequences. 

1. Be patient and stay consistent: If your credit score has dipped, it will take some time before it bounces back. It is important to stay patient and consistent during this phase. Keep repaying bills on time, maintain a low credit utilisation ratio, do not apply for more loans, and try to increase the length of your credit history. These are some of the easy ways to boost your credit score if done consistently. 

A good credit score can help you secure lower interest rates on loans and credit cards.

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