Some of the Common Credit Mistakes to Avoid

Loan availability as well as the terms and conditions of the loan depend on several different factors, one of it being the applicant’s credit score. An individual’s credit score is a numerical representation of their creditworthiness that lenders assess to check the likelihood of a loan applicant paying bills on time as well as gauge the risk involved in entering a lender-borrower relationship with the applicant. A high credit score shows that a borrower has been a responsible credit user and can be trusted with timely repayment of loan money. Further, while eligibility criteria for credit score vary from lender to lender, it is established that a high credit score in the range of 750 to 900 ensures quick approval and beneficial loan terms, such as a low rate of interest and higher loan sanction. 

Borrowers are advised to do a free CIBIL score check before making an application for a loan. If your credit score is 750 or above, move ahead with the application procedure. However, if your credit score is tilted towards the lower side of the spectrum range, take measures to improve credit score immediately.   

In general, there are a few common credit mistakes that borrowers can avoid, to maintain their credit score in the ‘very good’ and ‘excellent’ ranges. Let us read about them in detail. 

Common Credit Mistakes to Avoid 

Not Paying Bills and EMIs on Time

If you want to maintain a good credit score, always clear EMIs and credit card bills on time. Your payment history has a major impact on your credit score. Not many borrowers know that late payment stays on an individual’s credit report for 7 years. 

If your CIBIL score check shows a bad credit score due to a missed EMI payment, with time and by practising rigorous financial discipline, you can repair the bad credit score on your credit report. However, the entry will stay for 7 years.

Here’s the good news: borrowers must know that EMIs are considered missed only when they miss the due date by 30 days or more. So, if you have missed a due date recently, clear the EMI as soon as possible.

Clearing Only the Minimum Due

Do not keep paying just the minimum due on your card. Instead, try and clear the entire amount. Paying only the minimum due amount will not only make you pay more in interest in the long run, but it will also increase your credit utilization ratio, which refers to the ratio of credit used to credit available. Borrowers must keep their credit utilization ratio under 30% if they wish to avail themselves of the best loan terms and deals.

Not Limiting One’s Credit Applications

If your CIBIL report isn’t looking as good as it should, you must limit your loan and credit card applications. There are two reasons behind this. First, when you take too many loans, keeping track of due dates becomes difficult and when this happens, people miss their EMI due dates. Late payments, in return, hamper one’s credit score. The second reason you should avoid applying for too many loans is that every time you apply for a new loan or credit card, your lender enquires about your CIBIL score and other details. These enquiries get registered as hard enquiries and too many hard enquiries lower a borrower’s credit score. 

Not Checking Your Credit Report Often

Borrowers must check credit report online from time to time. Many websites offer this service for free. However, if you want the most reliable and accurate credit report, you can go to the website of one of the four credit information bureaus and apply to have your credit report sent to your email ID.

Also Read: Importance of CIBIL Score and Tips to Improve It  

Credit information bureaus and credit reporting agencies assign a credit score to an individual based on the information passed to them by lenders and financial institutions. Sometimes, lenders pass wrong information to these agencies by mistake and this leads to a borrower’s credit score going down. Borrowers must, therefore, check their credit reports from time to time for errors. If they see any mistakes, they must report the errors immediately. It takes up to 60 days for credit agencies to rectify these errors and another few weeks for the rectifications to reflect in the report.

Closing Old Loan Accounts

You must have heard about zero and negative credit scores. What do they mean? When a borrower’s credit history is relatively new and therefore, the credit information bureaus do not have much information on the borrower, credit information companies assign them a ‘0’ credit score. On the other hand, when a borrower’s credit score is negative or -1, it simply means they have no history at all. Lenders find it difficult to take a call on applications from borrowers with a zero or negative credit rating. Many borrowers make the mistake of closing their old loan accounts, which leads to their credit history being wiped out and their credit score becoming zero. It is, thus, that borrowers should never close old loan accounts.

Not Being Patient

Many borrowers make the mistake of not being patient when it comes to improving their credit scores. The financial discipline you are practising will take time to show results. If you think your credit score will become excellent in only a few weeks, you are wrong. It is impossible to improve credit score immediately. Bettering one’s credit score takes time. So, do not be impatient. Be prepared to wait for at least a few months and expect to see concrete results only after being disciplined for at least a few months.

Also Read: 7 Tips to Help You Improve Your CIBIL Score 

Final Words 

An individual’s credit score is one of the first things that borrowers check about them when they apply for a loan, such as a property loan or housing loan. Most of the time, lenders decide whether to extend a loan to a borrower or not simply by looking at their credit score. Therefore, all borrowers must try their best to maintain a good credit score. Avoiding the mistakes mentioned in this article will certainly help.