Mistakes that tank your credit score

Mohan Jayaraman

A smart consumer of credit is the one who uses the available credit lines prudently, knowing when not to avail of it, and never fall into a debt spiral. Often, many individuals land up with a poor credit history due to ignorance or indiscipline. Below are few common yet artless mistakes that often lead to stressed credit scores and the subsequent likely denial of credit to individuals.

No debt never means good credit

In today’s aspirational world, it would be hard to live debt-free even though many do so. However, such ‘lack of credit history’ might lead to eventual denial of credit since lenders do not have any evidence of a reliable payment history or responsible behaviour on behalf of such individuals. So, if you thought of keeping off credit totally, it would be equally unwise.

Ignoring your credit report

Your credit report — a summary of your financial history — helps lenders decide whether to approve your credit request. Thus, if there is any bad remark (due to delayed payment or other aspects) on your credit score, it would be sensible to check the credit report regularly and take corrective steps against misreporting, theft of identity and even accounts that you don’t recognise.

Missing regular payments

Though the credit score models have many moving parts, paying your credit obligations regularly is one of the major factors that influence your credit score. Thus, your credit history – otherwise sound – can take a hit even if you miss or delay a single payment, lately. Once a credit line is acquired, it is prudent to remember and set repayment schedules. However, in case of genuine issues, one must contact the lender to avoid being reported to credit rating agencies.

Paying minimum on your outstanding

When it comes to paying bills, missing the payment is not the only cardinal mistake that individuals make. Many believe paying the minimum is enough to escape poor remark even though they may end up paying much more than the borrowed amount in interest itself. Thus, it is prudent to keep the utilisation to the minimum which in turns makes the repayment easier and utilisation ratio better.

Getting cash advances on cards

Taking cash advance on credit card —unless in an emergency — is a bad idea since it would carry higher interest rate (than purchases) and transaction fees and offer no grace period. Moreover, the interest on the borrowed sum starts heaping up fast. Therefore, it might be cheaper to pay for the expenses using the credit card than withdrawing money, using it.

Applying for too much credit options 

When they are in need of credit, individuals tend to apply to several lenders at once. This in turn will lead to many lenders enquiring about same individual, simultaneously. Such an approach can create a wrong impression that an individual may be seeking to borrow beyond his abilities, hurting the credit score. The ideal way to go is to start with one lender and await the response. Also, if you are planning to seek mortgage, car loan or even appliances on credit, hold back your applications for credit cards for some time.

Using too much of available credit

Individuals often overuse or maximise the limit on credit options (especially credit cards) without realising the potential damage to their credit score. In fact, a lower ratio is better for your credit score. Even a regular payment history would not help as a higher usage is seen as a risky behaviour. Thus, a good credit utilisation ratio (the actual usage vs accessible credit) is a key factor, determining your creditworthiness hence it is ideal to keep the debt on each credit card around 30% and the overall credit around 10%. This can be achieved by a judicious mix of available options.

Closing old credit card accounts

You may think that closing an old credit card is good to improve your prospects for a new one. Wrong. One must understand that your utilisation ratio has two elements: outstanding balances and the total available credit. If one of these heads goes up, it leads to higher ratio hence it’s a bad idea to close a credit card account even if you don’t use it. In fact, if you have an older credit card account with a good repayment history, it can truly boost your credit history and therefore your overall score.

Being a co-borrower 

It is very common among Indian urban households to borrow jointly (or as a guarantor). However, such a process can weigh down the credit score of both individuals equally since it shows up on their respective credit sheets. And if the principal borrower fails to pay on time or delays obligations, it impacts the other too —being the co-signee. It is therefore advisable that one must be careful about the ability of the prime borrower to repay the credit.

Conclusion

While some of these mistakes can be managed or corrected, some need self-control on the part of individuals to be avoided. Generally, references that lead to weak credit scores and even denial of credit might last for years, but one can always learn from mistakes and take corrective actions, including consistent on-time payments, keeping card balances low and seeking fewer new accounts.

The writer is Managing Director, Experian Credit Bureau, India. The views expressed in this article are his own