Managing finances is an essential aspect of personal finance, and timely payment of the equated monthly instalments (EMIs) on your loan is crucial for maintaining a good credit score. The credit score is evaluated by the Credit Information Bureau (India) Limited (CIBIL), which maintains the credit history of individuals and businesses.
In case you have missed out on your EMI payments, it can leave a severe impact on your Cibil score, thus affecting your creditworthiness.
“When you approach a lender for a loan or a credit card, your credit score is usually the first thing they check. Borrowers with a credit score of 750 or above are more likely to receive approval for a loan. Moreover, some banks have tied their lowest interest rates to credit scores. In today’s world, credit scores have become increasingly important, as many companies and recruiters also check them before hiring potential employees,” says Adhil Shetty, CEO, Bankbazaar.com.
According to experts, even a single late payment can dent your score, and it will take two-three quarters to build it back up.
“If you have missed a payment or a due date, you may want to automate the process going forward, so that the payment is cleared on a fixed date well before the next due date. One should set auto-pay or reminders for all bills and payments so that they don’t miss anything going forward. Ideally, do not apply for a fresh loan or credit card for some months. If possible, keep your utilisation ratio on your credit cards as low as possible, not more than 30 per cent. All these should help you build up your score over the next few quarters,” adds Shetty.
Impact Of Missed EMI Payments On Your Cibil Score
EMI is the fixed amount that you need to pay to the lender every month towards your loan repayment. Missing out on EMI payments will mean that you are defaulting on the loan, which would then get recorded in your credit history, and it will reflect poorly on your credit score.
A Cibil score ranges from 300 to 900, and a score of 750 or above is considered good. Each missed EMI payment can reduce your credit score by 50-100 points depending on the type of loan and the amount outstanding. Moreover, if the default continues for an extended period, it may lead to legal action, which can further damage your credit score.
Ways To Mend Your Cibil Score If You Have Missed Out On EMI Payments
If you have missed out on EMI payments, it is important that you take corrective measures to avoid further damage to your credit score. Here are some ways in which you can mend your Cibil score.
Pay your dues on time: Ensure that you pay your bills and EMIs on time. Late or missed payments can have a negative impact on your credit score.
Reduce your outstanding debt: High credit utilisation, i.e., using too much of your available credit limit, can also have a negative impact on your credit score. Hence, it is advisable to keep your credit utilisation below 30 per cent.
Check your credit report: Check your credit report periodically to ensure that there are no errors or inaccuracies that may be affecting your credit score. If you find any errors, report them to the credit bureau to get them corrected.
Close unused credit accounts: Having too many credit accounts can negatively impact your credit score. Hence, it is advisable to close any unused credit accounts to improve your credit score.
Use credit responsibly: Avoid taking on too much debt and using credit cards for unnecessary purchases. Using credit responsibly can improve your credit score over time.
Approach your bank for a repayment plan: If you are struggling to repay your debts, it is advisable that you approach your bank for a repayment plan. Many lenders offer flexible repayment options, such as increasing the loan tenure or reducing the EMI amount, which can help you repay your debts and improve your credit score over time.
Says Anant Ladha, founder, Invest Aaj For Kal, a financial advisory firm: “You could write a letter to your creditor explaining why you paid late. Ask them to waive off the late payment and assure them it won’t happen again. If they do agree to forgive the late payment, your creditor should adjust your credit report accordingly.”
Missing your EMI payments can leave a big impact on your Cibil score and severely affect your creditworthiness, too. Thus, it is advisable that you steer clear of actions that may have a negative impact on your credit score, as restoring it to a healthy level is a time-consuming process.
Even though consistently paying off your debts in a disciplined and timely manner can contribute towards a good credit score, it is not an overnight fix. It usually takes a minimum of six months to reflect any progress and may take up to two years to reach a desirable score. Your credit score is built on your credit history over several years, and so it’s that important to maintain it throughout your life.