The importance of a high or ‘good’ credit score cannot be stressed enough and making a credit mistake can prove to be detrimental to your credit health. These days, across the globe, the usage of credit reports has gone beyond just the banking and financial services domain, but extends to even determining whether a prospective landlord would be willing to rent out their property to you, or to determine your eligibility for a new telecom connection.
A high credit score can work wonders for you – it can be the ley to you getting the most competitive deals when it comes to availing of a loan or credit card. So the next time you decide to purchase a home or replace your car, remember that your score can make the difference between a better rate of interest, or even whether your loan application can go through.
To maintain a good score requires diligence and financial discipline, and to make sure you don’t damage your score, here are some common credit mistakes that you must avoid.
Increasing credit card limits
While having significantly high credit card limits may look and feel good, remember that they are often the stepping stone to temptation, wherein you eventually wind up spending more money than you’d imagined. It is always easier to slide into a debt trap as compared to getting out of one. Hence keep the card limits generous, but not so much as to entice you to spend beyond your means.
High credit utilisation
Your credit card comes with a credit utilisation limit, but maxing it or even coming close to it on a regular basis can damage your credit score. When you use almost all of it regularly, it signifies to a lender that you are likely to be insolvent and rely on debt to make ends meet. The ideal recommended usage is 30 percent of your credit limit.
Making minimum payment
While cards do offer you the freedom to make only the minimum payment towards your total card outstanding each month, it is not something you want to cultivate as a long-term habit. Remember, the interest rates on a credit card coupled with the finance charges and taxes thereon can be exorbitant, and will pull you down into a debt trap before you can realise it. Hence using this option on a one-off basis may be okay, but definitely not as a regular practice.
This is one thing that can severely damage your credit score. Delayed payments again are an indicator of someone who is unable to meet financial obligations. It is likely that an individual is spending beyond their means and racking up purchases on a card that they can ill afford. Hence whatever else you may do, ensure that payments are made on time, and you do not delay, or worse, miss a payment entirely. Set up payment alerts on your mobile device, or register for auto debit facilities from your bank account.
Closing ‘good’ old debt
Let us say you’ve been judiciously using a credit card for the past decade or more. This card, then, can be a gold mine of positive information to a potential lender, as the repayment behaviour detailed on this card account can prove to be exemplary. Hence do not close these old accounts, but instead, maintain them well as use them as a yardstick to help gauge your credit behaviour.
Not using credit cards
Not using cards can also be detrimental to your score, because a lender has no yardstick by which to gauge your credit performance. All it takes is sensible usage of a credit card to establish a strong credit history and firmly entrench yourself as a person who can handle debt responsibly.
Being a co-signer on a loan
While you may want to help out a friend or family in need, think twice before you consent to being co-signer on a loan. This is because even if you are not the primary borrower, the loan will reflect on your credit report. If the borrower defaults on a loan, you as co-signer are required to make the payment towards the loan outstanding.
Multiple account enquiries
Each time you apply for a credit card or loan, your credit report is hit with a hard credit enquiry. This in the short term brings down your score significantly and bringing the score back up to par will again require time and effort. Hence apply for debt (be it a loan or card) only when you really do require one, and not merely because it seems to be attractive option at the time.
Not tracking your credit report
Unless you know what your credit score looks like, there is no way that you will be able to work towards improving the same. It is advisable to request for a copy of your credit report from the credit bureau at regular intervals (say annually) in order to check the accuracy of the information contained therein. Any errors/ modifications need to be brought to the attention of the bureau (and the concerned lender) immediately, so as to pull your score back on track.
Protect your score
Now that you have an idea as to what credit mistakes can damage your score – often irreparably – work to maintain it to ensure good credit health. If you require assistance to know , consider availing of the services of a credit health management company.
The first step is to call for a copy of your credit report. Currently, none of the four credit bureaus in India (namely CIBIL, Equifax, Experian and CRIF High Mark) offer a . However, you can avail of from websites such as www.freescoreindia.com.
Don’t let your score bog you down, and instead, look towards building a strong financial future.