If a person has a high credit score, he or she may be able to get a loan and get a credit card faster than if they have a low credit score. Your credit score or CIBIL helps lenders learn more about your credit history. Hence, it is very important to practice good credit habits and maintain a good CIBIL lender score.
However, there are some common mistakes that can affect your credit score. In this article, we will discuss things to avoid in order to build a good credit history.
Maxing Out Your credit limit
Your debt utilization rate is one of the biggest factors affecting your credit score. Lenders usually won’t give you new loans if you’ve reached your credit limit, which lowers your credit utilization rate. Try to keep your credit utilization between 10% and 30%.
Not checking your credit report
This is probably one of the worst mistakes you can make, and it’s also the easiest to avoid. Regularly checking your credit score will alert you to any scams involving your name, show you your CIBIL score and help you identify areas where you can improve.
Delayed or Missed Loan
Missing loan payments or credit card EMIs can have a negative impact on your overall credit score and report. This is because all credit bureaus consider your payment history when creating your credit score. Missing a payment or two may not make a big difference, but if late or missed payments are common, it can take a huge toll on your credit score.
Owning too many credit cards
Even if you pay all your dues on time, it doesn’t seem like a good idea to have too many credit cards open at once. You may not be able to use all your available credit, but lenders know what happens if you max out your card.
Co-Signing a Loan
When you co-sign a loan for someone else, you become responsible for the loan if they default. Not only that, it also affects your credit rating. Late or late payments can also have a negative impact on your credit report.
Closing a credit card
Even if you don’t use a particular credit card, it’s a good idea not to close it unless absolutely necessary. This is especially true for older credit cards. How long you’ve owned a credit card is an important factor in building your credit score. Here’s why closing a credit card can have a negative impact on the cardholder’s credit history.
Paying the minimum due
Making regular payments on your bills is great, but paying the minimum due isn’t. Remember, you’re can’t really go much far with paying only the minimum balance as that will only lead an increase in the overall credit utilization ratio.
Having too many unsecured loans
Personal loans, student loans, credit cards, etc. Unsecured loans are not guaranteed. It is given based on a person’s income and financial behavior, independent of credit or CIBIL score.
If someone has too many unsecured loans in their name, it means they are over leveraged and a risky candidate. Multiple active unsecured loans can also have a big impact on your credit score.
Submitting Multiple Loan Applications at once
- Comparison of Loan Offers: By applying to multiple lenders within a short period, borrowers can gather various loan offers. This allows them to compare interest rates, terms, and fees to find the most favorable option, potentially saving money in the long run.
- Impact on Credit Score: Multiple loan inquiries within a specific time frame (typically around 14-45 days, depending on the credit scoring model) for the same type of loan (like a mortgage or auto loan) are often considered as a single inquiry for credit scoring purposes. This minimizes the potential negative impact on the credit score.
- Negotiating Power: Having multiple loan offers can give borrowers negotiating leverage. They may use competing offers to persuade lenders to match or improve terms, such as interest rates or closing costs.
Disadvantages:
- Potential Credit Score Impact: While multiple inquiries for the same type of loan might count as a single inquiry, submitting numerous loan applications within a short period could still impact the credit score. If the applications spread across different types of loans, each inquiry can affect the credit score separately.
- Time and Effort: Applying for multiple loans requires time and effort to fill out applications, gather necessary documentation, and communicate with various lenders.
- Confusion and Decision-making: Having multiple loan offers can be overwhelming and lead to confusion when comparing terms and selecting the best option. It might be challenging to keep track of each loan’s specific conditions and requirements.
- Perceived Risk to Lenders: Some lenders might view multiple loan applications as a sign of financial instability or desperation, potentially affecting the approval process or terms offered.
- Potential for Declined Applications: A string of loan applications might lead to multiple rejections if lenders perceive the borrower as too risky or overextending financially.
Bottom Line
Having good credit is essential, so don’t make these mistakes and lower your credit score. Focus on making all your payments on time and keeping your balance low. And if you’ve already made the mistakes above, don’t worry. Learn from your mistakes and move on.
