Five Common Credit Mistakes That Ruin Credit Scores
Credit Score is a 3-digit number that represents your creditworthiness. Banks and NBFCs look at credit score as one of the most important factors while evaluating your loan or credit card application. A low credit score makes your chances of getting kind of loan extremely tough as lenders would perceive you as a ‘risky’ profile. And even if you are approved for the loan, the rate of interest is going to be much higher for you.
As credit bureaus score you on the basis of credit behaviour, even a small mistake in can adversely impact your financial health for the long term. Here are the 5 most common mistakes that you need be wary of:
Not reviewing credit reports regularly: Credit bureaus calculate your credit score on the basis of your outstanding loans, EMIs, past credit accounts, credit card balances, loan and credit card applications and your past repayment history. Therefore, any wrong information about these factors, either due to clerical errors on the part of the lender or the bureau or due to any fraudulent transaction or credit application, can reduce your credit score. As of now, checking your credit report at periodic intervals is the only way to detect such errors. Reviewing your credit report regularly also helps you to track and build your score over time.
What to do: Get your free credit report from each of the credit bureaus at periodic intervals. Alternatively, you can visit online lending platforms to get your free credit report and monthly updates of it. Contact the bureau or the lender on finding any wrong information.
Missing repayment dates: Discipline regarding repayment of debt is widely believed to be the most important factor that determines your credit score. Banks and NBFCs avoid lending to those who failed to keep up with their loan or credit card commitments. Lenders can be quite prompt in reporting late payments of EMIs and credit card bills to the credit bureaus, which will then list them in your credit report and reduce your score accordingly.
What to do: Ensure timely repayments of your EMIs and credit card outstanding by the due date. If you are prone to forget your repayment dates, set up standing instructions in your savings account to enable automatic repayments on pre-set dates.
Having higher credit utilisation ratio: This ratio is the proportion of your total credit limit availed by you. Lenders consider those having credit utilization ratio of over 30-40% as credit hungry and hence, more likely to default. Thus, credit bureaus too reduce credit scores on breaching this level regularly.
What to do: Try to keep your credit utilisation ratio within 30%. Ask for a credit limit increase from your existing card issuer if you are frequently breaching this limit. If your card issuer rejects your request, apply for an additional credit card.
Making too many credit applications in a short span: Whenever you apply for credit card or loan, the card issuer/lender will fetch your credit report from bureaus. Such requests are considered as ‘hard enquiries’ and each of them will pull down your credit score by a few points. Making too many loan or credit applications within a short span will lead to faster depletion of your credit score, thereby reducing your future loan eligibility.
What to do: Instead of making direct application with the lenders, avail the services of online lending market places to compare various loan and credit card applications available on your credit score and other eligibility criterion. Although these marketplaces too will fetch your credit report from the bureaus, such enquiries are considered as soft enquiries and do not reduce your credit score.
Opting for credit card or loan settlement: Lenders often offer one-time settlement option to loan or credit card defaulters. They lure such borrowers to pay a lump sum amount, which is usually much lower than the outstanding amount but higher than the principal amount. The rest of the outstanding is waived off. However, lenders and credit card issuers report such settlements to the credit bureaus, which list them in the credit reports and reduce the credit score accordingly. As these defaults remain listed in the credit reports for a considerable period of time, lenders will resist from lending to such borrowers.
What to do: The interest rate levied on credit card outstanding, also known as finance charges, is probably the highest among all credit options. This makes unpaid credit card outstanding a perfect recipe for falling into debt traps. Hence, convert your credit card outstanding into EMIs if you lack the resources to pay it off within the same billing cycle. The interest rate charged would be much lower than the finance charges. If your card issuer refuses to convert your outstanding into EMIs or charges an unreasonable interest rate for it, then transfer your card balance to another card issuer or avail a personal loan to pay off the credit card balance.
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