The credit score is a crucial rating issued by an authorised credit bureau that ascertains the creditworthiness of the person. It is one of the first points of considerations by any lender while considering the application for any type of loan or a credit card. An applicant with a higher credit score will get the sanction of loan applied easily and will also be offered a higher credit limit as against a person with a lower credit score.
Hence, it is of utmost importance that a person should maintain a healthy credit score. There are many occasions or common mistakes that lead to a reduction in the credit score of the person. Many times the credit score is unknowingly harmed by any action of the person due to lack of information or misguidance.
Given below are a few common mistakes that have to be avoided by a person that would result in the reduction of their credit score.
What are the common mistakes that damage the credit score?
A person having a higher credit score can easily get loans and credit cards as compared to a person with a lower credit score. Also, the applicant can negotiate a better rate of interest for loans or can get a higher loan amount approved. Some of the most common mistakes that can hamper the credit score of a person are discussed below.
Failing to clear credit card dues or loan EMIs
Credit card dues and loan EMIs have to be paid regularly by the person to ensure that the credit score remains healthy. Nonpayment of these dues is the single most contributing factor for the decrease in credit score.
Consistently paying only the minimum amount due on credit card
When the credit card statement is issued to the cardholder, there are two types of dues mentioned. One of them is the total amount due for the previous period and the other is the minimum amount that has to be paid if the cardholder is unable to pay the entire amount due.
This minimum due amount payment ensures that the cardholder can continue to use the credit facility till the next credit statement is issued. However, the cardholder is charged interest on the balance unpaid for the previous month. Also, consistently paying only the minimum amount due reflects poorly on the creditworthiness of the cardholder. This also leads to a decrease in the credit score of the cardholder.
The excess credit utilization ratio
The credit utilization ratio is the ratio of the credit availed out of the total credit limit permissible to the cardholder. The optimum credit utilization ration as per many experts is anywhere from 30% to 50%.
Cardholders should keep their credit utilization ratio in check to ensure as it is an essential parameter influencing the credit score. If the credit utilization ratio is higher than the range mentioned above or in some cases 100%, it tells the lenders that such person relies heavily on the credit issued to meet his/her expenses and is a high-risk candidate for any loans or credit cards.
Applying for loans through multiple lenders
When a person applies for loans through multiple lenders, it shows poorly on the creditworthiness of the applicant. It shows the dire need for finance on part of the person and also the lack of resource to meet the financial needs. Hence, it negatively affects the credit score of the person.
Applying for multiple credit cards or too often
Applying for multiple credit cards or applying for credit cards too often also negatively impacts the credit score of a person. It shows the lenders that such a person needs extensive credit to meet their financial requirements.
Delay in meeting credit card dues or loan EMIs
While nonpayment of credit card dues or MEI has an adverse effect on the credit score of the person, a delay in such payments is also bad for the credit score of the person. A persistent or frequent delay in payment of EMIs or credit card dues reduces the credit score of the person.
Failure to report fraudulent charge on credit card
Reviewing the credit card statements that are issued each month is essential. If there is any fraudulent or erroneous charge it has to be reported by the cardholder immediately. Failure to do so will mean that the cardholder has to pay more amount than what is actually due. Nonpayment or delay in payment on account of such erroneous or fraudulent charge without reporting or explanation will adversely affect the credit score of the person.
Closing a credit card
Closing a credit card is not advisable unless it is absolutely necessary (for example, when the charges outweigh the benefits), especially the older credit cards. The period of holding a credit card is a contributing factor in building the credit score. Hence, the closing of the credit card will have an adverse effect on the credit history of the cardholder (particularly when such a card is the only line of credit).
Common Mistakes That Decrease Your Credit Score FAQs
1. What is considered to be a good credit score?
A. A credit score that is more than 750 is considered a good credit score by lenders and credit card issuing companies.
2. What is the ideal credit utilization ratio?
A. An ideal credit utilization ratio by some experts is 30% while by others it is 50%. Hence a cardholder should keep their credit utilization ratio in check and not let it go beyond 50%.
3. What are some of the fastest ways to increase the credit score of a person?
A. Payments of all the dues on time and meeting all the future payments in time are some of the fastest ways to increase the credit score of a person.
4. What are the benefits of a good credit score?
A. Some of the major benefits of a good credit score are the ability to negotiate and get a better rate of interest for loans, higher loan amount, lower processing charges, etc.
5. Can payment of utilities through my credit card boost the credit score?
A. Yes. Payment of utilities through credit card boosts the credit score of the cardholder over a period of time.
