Mistakes that can lower your Credit Score

Many of us have been using multiple credit lines, repaying loans, paying EMIs and avoid taking much of debt. Even though we think that all our credit lines are managed well, but due to some mistakes or lack of awareness, our credit score gets negatively impacted. Building a credit score is a time consuming process and a lot of effort is involved into it. Therefore, it is always better to avoid mistakes and be more aware and cautious while availing a lending product. Consumers with good credit score also need to check their credit reports for errors like incorrect or incomplete information and should immediately report to the respective credit bureau by raising a dispute, if in case you notice inaccuracies in your credit report.

Credit score is a 3-digit numeric that ranges between 300-900, wherein score close to 900 is considered good by banks and NBFCs. This 3-digit numeric depicts the creditworthiness of an individual. Globally, credit report and score is provided by four major credit bureaus that include TransUnion CIBIL (Credit Information Bureau (India) Limited), Experian, Equifax and CRIF High Mark. According to CIBIL “79% of loans or credit cards are approved for individuals with a CIBIL Score greater than 750”.

Useful Link: CIBIL Vs Experian Vs Equifax Vs CRIF High Mark

Below mentioned is a tabular representation of the TransUnion CIBIL score components with their respective percentage share:

Now, let’s become familiar with some of the missteps that may dent your credit score.

Not reviewing your credit report: Consumers availing credit lines and doing payments generally assume that their credit score is good and well managed. However, there could be some errors or inaccuracies appearing on your credit report which are lowering your credit score. Performing a regular check on your credit report is mandatory and even more important before applying for any loan or credit card. Errors may occur from the side of credit bureaus, as sometimes lenders do forget to update your information, if in case you have changed your address or name.

Delayed or missed loan/credit card payments: Missed or delayed loan repayments or credit card EMIs impact the most on your credit score, as all the credit bureaus take a note of your payment history while generating your credit score. Generally, one or two missed payments will not hamper your credit score, but if delayed or missed payment is consecutive or quite regular then there will be a significant dip in your credit score.

Co-Signing loans: Its always liked and appreciated when you Co-sign a loan for your close acquaintances and getting them out of financial crunch. However, it becomes a hassle for you if in case that borrower misses some payments or makes late payments. Due to this your credit utilization ratio gets increased and impacts your credit score negatively.    

Submitting multiple loan applications simultaneously: It is not a good practice to follow, as each application submitted to lenders gets reflected on your credit report. Multiple loan applicants appearing on your credit report can be accessed by any financial institution you choose to avail loan from. This practice leaves a negative impact on lenders which also results in lowering your credit score and moreover your negotiating options get reduced.

Availing numerous unsecured loans: No collateral is required, if you avail unsecured loans, including personal loan, education loan, credit card and business loan. Unsecured loans are granted on the basis of individual’s income and expenditure behavior. If an individual avails multiple unsecured loans, it is evident that he/she is already under too much debt and makes the person at risk. This practice impacts his/her credit score negatively. 

Maintaining high credit utilization ratio: Credit Utilization Ratio in any given scenario should be below 30% and if not then the consequences shall be faced by the consumer in the form of his/her credit score getting low. Lenders have this impression that the borrower with high credit utilization will have difficulty in repaying the money. Using multiple cards will definitely balance out the expense burden from single card. For example, if your card’s credit limit is Rs. 1,20,000 and are planning to buy an item worth Rs. 55,000, your credit utilization ratio will rise up to 45%. However, if you hold a second card with its credit limit raised by Rs. 60,000, this will make your utilization rate come down to about 30%. Thus, helping you in balancing and maintaining credit utilization ratio.

Closing old accounts or credit cards: Closing your old accounts will lower the average tenure of your accounts, thus will hamper your credit score. Also, closing your old accounts will decrease your overall available credit, thereby disturbing your credit utilization ratio. Hence, customers should not close down their old accounts as their accounts showcase their long association with the lenders that customers have operated and managed accounts for longer duration.

Reaching credit limit frequently: If the spends on your credit card frequently reach the credit limit, it will further lead to constant high repayment burden and the acceptance on your loan application will negatively affect your repayment capability. Thus, considering this factor, the credit bureau may keep you in a lower bracket, so as to inform the lenders of your high credit utilization.

By taking a look at these relevant measures, you might have better understanding and proper hold on your previous mistakes so that you can get them rectified. Hence, it is always preferred to maintain a high credit score to avail the benefits of getting loans at a lower interest rates.