Common Credit Mistakes we should avoid

Nowadays, a credit score is very important. If it is not good, then we may have to pay more interest, or sometimes we may even be denied a loan. So let’s understand what we need to do so as to maintain a good credit score.

 

1.      Pay your Bill on Time

We should be very careful while paying our outstanding bills. Missing even one payment can hit your credit profile negatively. Overdue payments show up on credit report for many years, although the impact on gets diminish over time with the addition of newer positive actions. Still, once overdue payments enter your record, they stall your credit progress.

A good tip is to set up payment reminders, even better, is to set up an autopay facility in the account you make your payments from, ensuring of course that you have enough money in your account each month to cover the auto debits.

 

2.      Don’t use the ‘Minimum Payment’ Option

Generally, in credit card bills we see the minimum due payable, but using that facility is not just a risky behaviour, it’s ultimately a very costly habit to get into. The interest will cost you more money (credit cards charge 36-48% P.a. interest as well as GST) in the long term than paying up your debt every month. This also damages your credit profile. By making just the minimum payment every month, you end up carrying a high balance on your credit card. This increases your credit utilisation ratio, i.e., the percentage of your available credit that you’re using at a given time, which could cause significant damage if left unchecked. A credit utilisation ratio above 30% can start to drag down your scores. So, the lower it is, the better.

 

3.      Don’t shop for loan everywhere

Every time you apply for loan, the lender makes a hard inquiry to check your report and determine whether to approve your application. When you apply for multiple loans in a short period, lenders may view you as a riskier borrower. So, to avoid damage to your credit profile, better first do proper research, get details informally and then only apply for the one that you think is a fit for you.

 

4.      Don’t take Unnecessary Credit

We should take loan only when we actually need it for some necessities. Buying electronic gadgets, avoidable holidays or luxury cars on loans is something which could be avoided. Taking un-necessary loans make it more challenging to balance your budget and to keep your payment schedule. The simple solution is to apply for credit only when you need it, thereby not stretching yourself financially and avoiding any build-up of interest/penalties on overdue payments.

5.      Don’t become a guarantor without due diligence

We need to be cautious while giving a guarantee or co-signing a loan to a friend or family. As it can become a problem for you if the borrower misses or delays their payments. Because your credit score gets impacted negatively by their delinquency/poor credit behaviour. Hence, you should be cautious when co-signing any loans.

 

6.      Check Your Credit Score and Report regularly

Monitoring your credit score & report and keeping a tab on the developments not only help you to keep track of your progress, but it also helps you to spot potential problems and address them before they can significantly damage you credit profile. Now-days all the credit score companies provide free credit report once in a year, this will help you to get the information and keep yourself updated regarding your credit score.

 

In short, getting to a healthy credit score takes time. Once you’ve attained it, good behaviours such as checking your credit score & report regularly, paying your bills on time, keeping your credit card balances low, and avoiding non-essential debt, helps maintain a healthy credit profile. So, steer clear of the credit missteps listed above to attain and maintain the best possible credit score.