9 financial mistakes that can damage your credit score

Credit products such as loans or credit cards typically are a part of most people’s lives. Most importantly, these products are the vehicles that help us overcome funding hurdles, allowing us to realise life goals, and thus, lead a richer, more fulfilled life. But, access to loans and credit cards is determined by your credit score. A high credit score can help fetch you lower rates and faster approvals on credit applications, while a low credit score can hamper your prospects of accessing credit.

Maintaining a healthy credit score is not difficult but does require effort. In the spirit of observing Credit Score Awareness Week, let’s take a look at some common mistakes which you must avoid to ensure your credit score stays healthy.

Missing or delaying the credit card payment

Credit cards are an unsecured payment tool which gives you access to revolving interest-free credit, provided repay the outstanding amount before the due date. Failure to do that will affect your credit score negatively. If you are unable to pay off your entire outstanding due, try to at least pay the minimum amount due to reduce the impact of non-payment on your credit score. In the meantime, arrange for funds to pay off the remaining dues.

Not repaying the loan EMI on time

Similar to credit card dues, loan EMI defaults, too, can hurt your credit score severely. EMI defaults are recorded on your credit report and repeated defaults can cause irreversible damage to your credit score, making it rather challenging for you to access credit in the future. To keep your credit score healthy, make sure to pay your loan EMIs on time.

Also Read: 10 ways to get out of debt before retirement

Maxing your credit card frequently

Frequently using up your available monthly credit card limit can damage your credit score. Maxing out your credit card takes your credit utilisation ratio (CUR) well beyond the advised threshold of 30% which will lower your score. To avoid this, you may either request your card issuer to increase your credit limit or re-evaluate your spending to stay within the prescribed credit utilisation limit of 30%. If you are eligible, you may also get another credit card and distribute your expenses over the two cards to keep your CUR below the 30%.

Closing a credit card

Closing a credit card is a little-known, but grave mistake which many people may commit unknowingly. When you close a credit card, not only does your aggregate credit limit (the combined credit limit of all your credit cards) reduce, but your CUR goes up. This can hurt your credit score. Moreover, if the old credit card has a healthy record, you will lose the benefit of that record too on closing your old card.

Having multiple unsecured loans

Having multiple unsecured loans in your name can reflect poorly on your financial management. Servicing multiple loans not only burdens you financially but can also lower your credit score until the loans are fully repaid. If you have fund requirements and must turn to a lender, try maintaining a balance of secured and unsecured loans.

Submitting multiple loan enquiries

Each time you apply for a loan, the lender makes a hard enquiry for your credit report to assess your creditworthiness. All these enquiries get recorded and are visible to the lenders who access your report. This can portray you as credit hungry, lower your creditworthiness as a borrower, and affect your credit score. To prevent this, begin by assessing your loan requirement before applying for the loan. Instead of multiple small loans, apply for fewer adequate-sized loans that will help cover your fund requirement.

Ignoring mistakes in the credit report

A credit report includes your credit activity and history. This includes your details (name, address, contact information), and details of credit lines in your name which may include the loan amount, date of payment, outstanding amount, etc. In case a loan repayment has not been recorded correctly in your credit report, it can result in a drop in your credit score. Besides this, there are many other errors which, if left unchecked, can impact your score. By checking your credit score regularly, you get the chance to spot errors and get them corrected before they can impact your credit score.

Opting for a debt settlement

A debt settlement is an arrangement wherein a lender may agree to forego a chunk of the borrower’s debt. While this may seem like an appealing option in times of financial difficulty, it can severely damage your credit score and credit standing. Instead of settling your debt, approach your lender to request for a moratorium or extension in the repayment tenure.

Financial indiscipline in the use of add-on card

Add-on cards are supplementary credit cards issued against the primary card holder’s account. If your close family members such as your spouse, or children, are using such an add-on card, you will still be held accountable by the lender for ensuring the dues of such cards are paid on time. In case of a default on an add-on card, the primary card holder’s credit score is impacted, and not the one using it. To avoid this from happening, keep track of bill dates for add-on cards and pay them on time.

Your credit score is a key indicator of your financial health. A healthy credit score is among the cornerstones that can help you build a healthy financial foundation for your life.

(The author is CEO, Bankbazaar.com)