5 Things You Should Avoid to Get a Better Credit Score
When it comes to financial matters, your credit score has a significant impact. Usually, people go through trial and error during early adulthood to understand the importance of their credit score, and more often than not, this approach can lead to serious mistakes that can devastate your score. Hence, if you want to maintain a high credit score, these are the mistakes that you should avoid making.
- Make Late Payments or Skip Payments
Make sure you never miss or delay payments on your Credit Cards and loans. Your Credit Cards and loans affect your credit score, and when you miss or delay payments, it adversely affects your score.
Don’t even be tempted to make minimal payments as that too would cause your credit score to head south. In case you have a money crunch and find it difficult to pay the entire Credit Card bill, opt for a Personal Loan to help pay off the Credit Card in full. The interest on a Personal Loan is much lower than what Credit card companies levy. Also, online financial companies often provide Personal Loans with flexible repayment options and customer-friendly terms.
2. High Credit Utilisation
Most people assume that as long as they stay within the prescribed limit of their Credit Cards, it doesn’t matter how much and how often they use the cards. On the contrary, using your Credit Card too often may damage your credit score.
Make sure you never use your Credit Card more than 30% of the set limit. If you exceed this percentage, your credit score will decrease as your credit utilisation ratio will increase. The same also holds true for loans. It is commonplace in today’s world for people to take loans frequently. If you take one loan after another, your credit utilisation is high and demonstrates the reckless financial behaviour. Hence, not only will a lender be wary of sanctioning loans to you, but it will also mar your credit standing.
The best way forward is to check out the different Type of Credit Cards in India and apply for those that you need. Use these cards prudently and sparingly and when possible, use cash to pay for things. Avoid taking loans that don’t appreciate your net worth. For instance, you can take loans to buy real estate as it appreciates in value with time, but using the loan to purchase jewellery will not have the same effect, as jewellery does not increase in value.
3. Becoming a Loan Co-applicant or Guarantor
You may want to help out a friend by becoming a co-applicant on their loan application, as it will ensure they get the approval. However, if your friend defaults, you would end up repaying 100% of the loan without benefitting from it. The same also holds true for a guarantor.
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You may want offer guarantee for a friend or family member when they apply for a loan. You don’t have a reason to worry if they repay the loan. However, if they default or refuse to pay the EMIs (Equated Monthly Instalments), your credit score will fall, and you will be liable to repay the loan, as a guarantor.
Become a co-applicant or guarantor only if you trust the person completely and know for sure that they will repay the loan on time. Otherwise, refrain from it.
4. Applying for Too Many Loans at Once
When you request a copy of your credit report, it is a soft inquiry and does not affect your credit score. However, when a lender requests your report, it is a hard inquiry. So, if you apply for too many loans in one go, there will be multiple requests for your credit report. It indicates that your financial situation is not too healthy and hence, it will cause your credit score to drop.
So, if you are looking for a loan, shortlist just one or two banks and apply for it. Otherwise, be prepared to see your score fall like a ton of bricks!
5. Defaulting on a Loan
Never default on your loan. It will be the final straw; your credit score will fall drastically. Also, lenders will enter your name in the blacklist, and you will find it next to impossible to get a loan in the future. Furthermore, lenders will leave remarks on your credit report that other lenders will be able to view.
So, make it a point to take loans that you can repay easily. Also, ensure you make the EMI payments on time to prevent the lender from labelling you as a delinquent borrower.
A high credit score means lenders will love and Credit Card companies will have no qualms about offering your Credit Cards. However, if you commit these five mistakes, your credit score will get damaged, and then it will take a lot of hard work and time to bring it up.
Also Read: 10 FAQs about Credit Scores That You Should Know
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