A credit score is a vital parameter to getting the best loan offers. A score of 630 or above is good enough to attract better loan terms and rates for Personal Loans. So, checking credit scores regularly and taking the necessary steps to improve and maintain them is imperative. While there is a lot of advice on improving the credit score, not much information is available on ‘what not to do’. Here we have rounded up a few things that can harm the credit score immediately or in the long run.
- Not Checking the Credit Report Regularly
Although everyone knows the significance of credit score, most people do not check them. Checking it regularly keeps an individual aware of their credit standing so they know they must take the necessary steps to improve their score. It also helps identify errors in the report in time and get them rectified.
- Making Multiple Credit Inquiries
Making multiple credit inquiries and requests within a short period can have a long-term impact on the credit report. It poses the applicant as credit-hungry, which lending institutions believe to be a high-risk behaviour. Moreover, multiple credit inquiries lead to several hard inquiries on the credit report, and each hard inquiry reduces the credit score by a few points.
- Having Errors on the Credit Report
If the credit report has errors, take prompt action to correct them immediately. Otherwise, they may stay on the credit report for a long time and potentially harm the credit score. Regularly check credit scores, review each entry in the credit bureau, and look for errors and contradictions. Contact the credit bureau immediately and request an investigation.
- Delaying Bill Payments
Payment history is a key component of credit reports. Credit bureaus monitor how prompt a person is with bill and EMI payments. Delaying bill payments is not a good sign since timely repayments improve credibility and help achieve a better credit score. So, ensure making all bills and EMI payments on time.
- Co-Signing a Debt
Co-signing a loan with a friend or family member can significantly harm the credit score. First, it appears on the credit report right away. Second, if the primary borrower fails to repay, the missed EMIs will also appear on the statement. Finally, if the account turns over to collections, it also appears as a red flag on the credit report.
- Taking Too Much Credit
Debt liabilities should be proportionate to income. Those with too much credit do not bode well with loan providers. Even if they make timely payments, lending institutions perceive them as high-risk cases with possible chances of default. So, maintain a credit utilisation ratio below 30% to maintain a decent credit score.
- Not Having a Diversified Credit Portfolio
Credit diversity demonstrates the debtor’s capacity to handle various credit forms responsibly. A healthy credit mix refers to various credit forms on the report. If an individual has only one type of credit on their report, such as Personal Loan, their score is likely to suffer due to lack of diversity. A diversified credit mix includes credit cards, Personal Loans, Home Loans, mortgage loans, and lines of credit.
- Keeping High Outstanding Balances On Credit Cards
Credit cards are convenient methods of revolving credit. Avoid using more than 30% of the credit limit and pay monthly bills regularly without defaults or late payments. However, those who do not manage their credit card debt efficiently have their credit scores drop considerably.
- Having a High Credit Utilisation Ratio
According to financial experts, an individual’s credit utilisation ratio should be at most 30% of their total credit limit. So, ensure using the credit cards carefully and keeping the total credit utilisation proportionate to income to keep repayments comfortable.
- Not Taking Any Credit At All
Not taking any credit at all is as bad as over-borrowing credit. For instance, when you apply for a personal loan, lending institutions want to see your credit history with responsible credit usage. Those who have not taken credit in their life will not have any history to prove their credibility. Despite popular belief, not taking any credit can affect the credit score as negatively as borrowing too much.
- Changing Jobs Frequently
Lenders gauge an applicant’s repayment capacity before approving their credit request. Those who have just started their career must wait for some time before getting their first loan or credit card. Once they maintain a stable job for at least one year, they can be assured of a steady income and go for loan applications. On the contrary, those who keep changing their jobs frequently cannot maintain income stability, which is a red flag for lending institutions and leads to multiple loan rejections, harming the credit score significantly.
- Closing Down Unused or Old Credit Cards
Although minimising the credit amount has positive effects on the credit report, retaining old credit cards while making nominal purchases is better than closing them down. Each credit card adds to the overall credit limit of an individual. When they cancel them, they lose out on their credit limit. So, retaining them and keeping them active is better than closing them.
- Using the Wrong Debt
You don’t need to take a Personal Loan of ₹ 5 Lakh to make an expense worth ₹ 4 Lakh. Doing that will mess up the DTI ratio when you check your credit score. Always evaluate the costs and borrow only what you need.
As evident, these are the biggest hits to an individual’s credit score. However, check your credit score regularly on the websites of reputed NBFCs and make corrections to bring it back on track and improve credibility. Avoid these issues and keep an eye on the manageable steps to building credit. After all, good credit is the place where opportunities begin.