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A good credit score is essential in order to get a smooth access to credit. However, many of our financial habits can adversely impact your credit score. Knowing and avoiding these mistakes can go a long way in maintaining a healthy credit score.
Six common mistakes to avoid for a healthy credit score.
- Avoid delaying repayments: Missing a due date of your credit card bill and not paying EMIs on time can have an adverse effect on your credit score. Remember that every delayed payment or late payment is reported by your bank/ lender to the bureau. While one or two payments might not impact your credit score, a consistent pattern of late or default payments should be avoided. If you tend to forget to make payments by the due date, set up email or SMS reminders or give standing instructions for the EMI or credit card amount to be deducted automatically from your bank account. This way you can avoid hurting your credit score.
- Keep away from high credit utilization: One of the most important factors that determine your creditworthiness is your credit utilization ratio. It indicates the percentage of available credit that you are using at any given point in time. If you consistently spend 30%-40% of your total credit limit, it gives an impression to the lender that you are ‘credit-hungry’ and that raises questions on your debt repayment capability. As a general principle, it is advisable to keep your credit spend within 40% of your credit limit so that your credit utilization ratio remains low.
- Do not close old credit card accounts: People generally tend to close their old credit cards and retain their newest cards. But you should actually do the opposite; the older your credit card, the better for your score. This is because it allows lenders to see a long credit history across multiple accounts to assess your repayment capacity. If you close your old accounts, your credit history becomes younger and it can negatively affect your credit score.
- Do not apply with multiple lenders: Whenever you apply for a loan or new credit card, you will be subject to a credit inquiry, which will reflect in your credit report. This is because lenders would check your credit score before proceeding on your loan application request. But too many credit inquiries can also affect your credit score negatively. Further, lenders are skeptical to lend to borrowers with multiple loan application rejections in a short period of time. This is why it makes sense to apply through fin-tech lenders or online market-places to zero in on the best loan and credit cards offer from several banks without resulting in multiple loan queries and compromising your credit score.
- Check your credit report at regular intervals: Checking your credit score and report regularly is essential to identify any errors or mistakes as well the impact of your recent loan transactions on your credit score. You can easily get a free copy of your credit report and score from MyLoanCare.in. If you find any error, you can get them rectified immediately by contacting the credit bureau. Errors in your credit report or credit limits could unnecessarily drag down your score. Hence, make sure you keep a check on your credit reports periodically.
- Avoid impulse purchases using a credit card: Credit cards are a very convenient and secure alternative to cash. However, this convenience can be tempting and may land you in a financial crisis. Always practice caution when availing credit and avoid impulse purchases through your card. Remember to repay the amount after the grace period is over. Hence, it is important to spend your repayment capability. Frequent utilization of credit on your credit card as well high level of credit utilization as a percent of your credit limit can hurt your credit score. Thus, disciplined swiping of the credit card is crucial in maintaining a good credit score.
These are a few common mistakes that many people unwittingly do and which can impact their credit score negatively. Practicing financial discipline and keeping an eye on your credit score can help you avoid these mistakes and secure your future by maintaining a healthy credit score.