Your credit score is a key to unlock various financial opportunities. Therefore, one must never take their credit scores lightly. If you thought that only loan defaults can hurt your credit score, think again. The plastic card that has become an indispensable part of your life is one of the major causes of dent in your credit score. Don’t believe? Take a look at five ways a credit card can bring down your credit score.
1. Applying for credit cards frequently
Lending money is a risky business, therefore before approving a credit card or loan application, creditors enquire about the applicant’s credit report from bureaus to assess their creditworthiness. Such an enquiry is called hard enquiry, which hurts your credit score. Therefore, apply for credit card only when you need it. In addition to this, lenders avoid credit profiles with multiple credit card accounts as according to them it is a sign of desperation. Instead of applying for multiple credit cards at different banks, use the one that you can handle efficiently and fits your requirements the best.
2. Maintaining high credit utilization ratio
Credit bureaus will lower your credit score if they find your credit utilization ratio high. For those who don’t know, a credit utilization ratio is the ratio of your credit available and credit utilised. According to credit bureaus and financial institutions, individuals who use more of their available credit frequently are risky prospects. Even if you pay your credit card bills full and on time, lenders after looking at your credit history will fear that you might max out your cards and have trouble in making future payments. Therefore, ensure that you do not utilise more than 30% of the credit available on your credit card. If you think that your expenses might increase, you may consider increasing the credit limit to avoid the impact.
3. Defaulting on credit card bills
Credit cards are easy to use at the time of a financial emergency. But one should not take the perks of using a credit card for granted. Not repaying credit card bills on time will ultimately make your credit score fall, which can further jeopardize your chances of getting credit approvals from lenders. Therefore, spend only what you can repay on time to lenders. In addition to this, avoid partial repayments as it gives an impression that you’re struggling with your finances, which again negatively impacts your credit score.
4. Defaulting on an add-on card
Today, credit cards are a necessity and banks know it that is why to widen its reach, they introduced add-on cards that can be extended to spouse, children and parents. The expenses incurred on an add-on card are billed to the primary cardholder. If the payments are not handled right, it can pull down the credit scores of both the primary and add-on card holders. To avoid such a situation, give add-on cards to those who can manage credit wisely and responsibly. Keep a track of the expenses as other’s negligence can impact your access to credit. To monitor the credit utilization, take a credit report from any one of the credit information companies or an online lending marketplace such as Paisabazaar.com to ensure that everything is in order.
5. Closing a credit card account
It’s a common belief that closing a credit card will increase credit score. But in reality, closing your credit card will not erase your credit history from your credit report. Therefore, it will not help you in increasing your credit score. However, it may hurt it. Lenders consider profiles with short credit histories riskier than those with longer histories. Closing your old credit card account will not impact your credit score immediately but over the years once the credit card no longer appears on your credit report, you might see an unexpected decline in your credit score. Therefore, one must carefully evaluate their decision to close a credit card before taking action.