5 common mistakes that lead to a low credit score
If you’re considering taking out a loan, here’s an open secret: your credit score will play a key role in determining your loan eligibility. Moreover, it is not only your eligibility that is affected by your score, a high credit score can also help you qualify for the loan on more favorable terms, such as lower interest rates compared to those who have a lower score. So, not paying attention to your score can cost you dearly in the long run.
What is the credit score?
Credit score is a 3-digit number calculated by credit bureaus using an individual’s credit history. Your credit score can vary between 300 and 900, and a score closer to 900 (like 750 or higher) is preferred by lenders. The higher your score, the better your chances of being approved for a new loan at a competitive interest rate.
You should also keep in mind that your income and net worth have no direct impact on your score. So even if you have a high net income, you may have a low credit score. Also, having a high score now doesn’t mean it won’t go down in the future. Checking your score regularly ensures your long-term financial well-being. One such portal where you can check your credit score for free is https://creditreport.paisabazaar.com/
Here are some common mistakes you should avoid in order to maintain a high credit score:
1. Repeatedly delaying payments
Failure to pay your loan EMIs or credit card dues on time will result in a lower credit score. While one or two late payments won’t have too much of an impact on your score, multiple missed payments over a long period of time are bound to have a negative impact on your credit score.
What to do: Avoid any delays in paying your credit card dues or EMI loans by opting for automated bill payment or providing standing instructions to your bank to debit your savings account by the due date. payment due date.
2. Too many unpaid debts
If you have a habit of accumulating too much debt, especially in the form of unsecured loans, your credit score can be negatively affected. A large amount of unpaid debt indicates low repayment capacity and a high risk of default. As a rule of thumb, if your total monthly debt repayment (EMI and credit card dues) is more than 50% of your net monthly income (NMI), it will lower your credit score as well as your chances of getting paid. to be approved for new loans/credit cards.
What to do: Borrowing money should always be a last resort. Avoid taking out too many loans or having too much credit card debt at once. This will help you maintain a high credit score.
3. Using too much credit
If you frequently use your credit limit (i.e. the maximum on your credit card), this is a bad sign. Doing this month after month will have a bad affect on your credit score. The proportion of your credit limit that you use regularly can have a significant impact on your credit score. Here’s how – If you have a credit card with a limit of Rs. 2 lakh and spend almost Rs 1.1 lakh every month, your credit utilization rate (CUR) will be over 50%. This will lead to a decrease in your credit score. Generally, a CUR below 30% is preferred by lenders as it is considered a sign of fiscal prudence.
What to do: Keep your monthly CUR at 30% or less to ensure your credit score is not negatively affected. This will increase your chances of being approved for additional credit in the future.
4. Opt for a settlement
If you’re low on funds and facing a cash crunch, the first thing that usually comes to mind is to either delay paying credit card dues or only pay the minimum amount. from. In both cases, your debt will accumulate and you risk falling into a debt trap. At this point, many borrowers opt for settlement by making a partial payment of the total outstanding dues which includes the principal and a portion of accrued interest to the lender. However, it hurts your credit score and lowers your chances of getting credit in the future.
What to do: Try to find ways such as borrowing from friends and family or a subsidized loan from your employer to pay off your accumulated debt in a timely manner to avoid the burden of high interest. Find alternative options to settlement such as consolidating credit card debt through a personal loan to reduce your repayment burden and maintain a decent credit score.
5. Not checking your credit score regularly
It’s good practice to regularly check your credit score and credit report for errors. This is because there can be simple reporting or clerical errors in your report that can negatively impact your credit score. You can only get these errors corrected if you regularly check your credit report and score. Keep in mind that if you’re checking your own credit report, it’s a “soft inquiry” so your score won’t be affected. On the other hand, an error that slips through your credit report unnoticed can potentially have a significant negative impact on your score.
What to do: You should get into the habit of checking your credit score and reporting regularly to identify errors. If so, they should be rectified as soon as possible through the applicable dispute resolution mechanism to minimize the impact on your credit score.
This is an investor education initiative by paisabazaar.com