What are some common mistakes that decrease your credit score?

What are some common mistakes that decrease your credit score?

Sometimes a low credit score is more due to lack of awareness on how the credit score is calculated and the important factors that constitute a score. Here are a few common mistakes that can be easily avoided if you wish to maintain a good score:

  1. Delayed or missed loan or credit card payments: This could be due to several reasons. Sometimes, if you have an unexpected spending emergency like medical expenses etc., you might skip one or two payments and make a full payment in a month or two, thinking it will not affect your score. That is a common mistake. Even a single delayed payment can cause your score to drop. Making a full payment later does not erase the negative effect of the initial delay.

    Sometimes you may miss a payment due to oversight. In this case, make sure you have a monthly payment reminder on your calendar. Many banks can send email or sms reminders for loan/card payments. Or you can have a standing instruction for your loan and credit card payments to be automatically debited from your bank account. If you have an auto –debit arrangement, make sure there is enough money in the account to make the payments. If there is not enough cash to make the full payment, it will be reported and affect your credit score.
  2. Making multiple loan applications: Many people do not realize that each time you make a loan or credit card application, the lender makes a “hard enquiry’ on your credit report. Every hard enquiry leads to a drop in your credit score. To avoid this, research the various offers online and only apply to the lender where you think you have the best chance of succeeding. Each loan rejection also leads to a drop in your credit score so make sure you apply where you think you have the best chance of being approved.
  3. Having too many unsecured loans: An unsecured loan is one which does not require collateral. Personal loans and regular credit cards are the most common kinds of unsecured credit. If you have too many unsecured loans, it signifies that you may have too many monthly repayment obligations.
  4. Spending too much on your credit card, even if you are within your credit limit: If you spend more than 50% of your credit card limit, it signifies that you are hungry for credit and do not have strong spending discipline. This can affect your credit score as well. For instance, if your credit limit is Rs. 1 lakh and you consistently spend more than Rs.50,000 a month on expenses, it will have a negative effect on your credit score. Make sure that you do not exceed 50% of your credit limit to protect your credit score from a negative impact.

All these are common mistakes that people might make because of lack of knowledge of what goes into a credit score. Avoiding these missteps will help you improve your credit score.

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