India's New Credit Score Rules: Why Your CIBIL Might Suddenly Drop

In case you have checked your CIBIL score and there has been an abnormal fall in it recently, then rest assured you are not the only one. Most Indian consumers have observed alterations in their credit ratings even after making their EMIs on schedule in the last few months. The reason? New credit rules presented by the Reserve Bank of India (RBI).

That is why in this blog we are going to simplify these changes and make them understandable so that you can rely on them and find out why your credit score possibly dropped and how you can improve it.

What is a CIBIL score?

Let us briefly know what a CIBIL score is and then we can proceed on to the new rules.

A CIBIL score is a numerical figure (between 300 and 900) that tells you how well you manage credit. It is computed using your loan repayments, use of credit cards, loan size, and other financial behavior.

A score of 750 or more is regarded as a good score and the loan application or obtaining the credit card is easier.

What are the new rules that changed the credit score?

Previously, the credit score hardly paid attention to whether you were making your home loan EMI payment or your credit card payments punctually. That is also significant, but RBI has now required credit bureaus (such as CIBIL, Experian, Equifax, and CRIF Highmark) to also consider the general credit consumption behavior of people, not merely repayment.

These are some of the main changes:

1. Full Use of Available Credit Hurts You More

It can reduce your credit score even when you pay your bill promptly and have used a large portion of your credit exposure.

For example:

Say your credit card limit is 100,000 and you spend 90,000 every month; your credit utilization would be 90%. This is considered risky behavior under the new rules.

2. The Problem of Too Many Loans or Credit Cards. Red Flag, that is

In case you have taken multiple loans or have several active credit cards, then your score can drop even when you are paying all your EMIs. The new system looks at whether you are overleveraged (more in credit than you can afford).

3. Inquiries of Loans Can Postpone Your Marks

Whenever applying for a loan or a credit card, the bank draws the credit report of a person. These are termed hard inquiries. Your score can be damaged because of too many hard inquiries in a given short time.

Why Did RBI Make These Changes?

RBI would like to have credit scores that provide a better representation of the extent to which individuals use and manage credit—their payments to others—not simply a representation of whether the individual pays their bills on time. This will further make the credit system more accurate and responsible, given that in countries like India, there is a rapid rise in the accessing of easy credit.

The new regulations are also facing the fact that the banks and lenders will not lend people money who might be safe at first sight but who are not financially overloaded.

The CIBIL score of yours decayed.

Various causes might have come about due to the decline of the score in case it was affected not long ago:

You are keeping at least 30 to 40 percent of the credit limit regularly used DONOT use more than 30 to 40 percent of the allowances or credit limits regularly.

Within the last 6 months, you have applied to take out different loans or credit card accounts.

You have too many numbers of unsecured loans (such as personal loans or BNPL).

Your total debt has grown bigger.

You have had a short credit history or you lack diversity in your credit (you have only a credit card and no loan).

These new factors can also reduce your score even when you are not late making payments.

How You Can Raise Your CIBIL Score

There are simple ways to guard or recover your credit score; here are the ways:

Maintain use of credit to a minimum.

Aim at not exceeding 30 percent of your total credit limit. In other words, as an illustration, in case your credit limit is 100,000, you should attempt not to spend above 30,000 in a month.

Do Not Apply for Too Many Loans Simultaneously

Applying too eagerly to loans or cards or doing it short-lived may hurt your rating. Use when you must.

Give the Cash in Time

Keep paying EMIs and credit card bills on time. This remains as one of the most critical factors.

Stay at a combination of credit

It is better to have a combination of secured debt (e.g., a home loan or car loan) and unsecured debt (e.g., credit cards). This indicates that you know how to handle various kinds of credit.

Historically Monitor Your Credit Report

Occasionally, your credit report has errors. Look at it once every few months and lodge a dispute in case of something appearing out of place.

Final Thoughts

Your CIBIL score represents the way you handle credit and this is something that counts a lot when you require a loan, a new credit card or even to rent a house. New rules of credit score in India are more stringent and they are also more precise.

So, in the case that your scores have recently decreased, do not panic. The first step is to be familiar with what is influencing it, and thereafter, you adjust your financial ways, small and smart.

A couple of months down the road, and with the proper procedure, your rating will rebound, and it even might rise as never before.