Bad Practices that Lead to a Bad Credit Score

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When you walk into the world of credit, the term ‘credit score‘ will always follow you wherever you go. It’s an extremely important factor in the realm of finance. Your credit score decides whether you are eligible for a new line of credit. It tells your potential lenders how likely you are of paying your bills on time. A good credit score represents good credit health.

What is Your Credit Score?

Your credit score is just a number that tells how worthy you are of getting credit. Lenders use it to evaluate whether you will repay your debts or not. While a high credit score will make your lenders consider you an appropriate candidate for credit, a low credit score will hinder you from getting credit.
However, you need to take credit if you wish to build your credit score. Funny, right? You need to take credit, you need to open a variety of credit accounts, and you need to be active in the borrowing market. A person without loans or credit cards will definitely have a poor credit score.
Well, credit score isn’t something that you can calculate by yourself. A handful of factors affect your credit score – the number of credit accounts you have, your credit and repayment history, the hard inquiries on your credit, etc. If you want to check your credit score, try mymoneykarma’s Intelligent Finance Tool.

Bad Practices that Dent Your Credit Score
As I already mentioned, a bad credit score can be a huge obstacle on your path to getting new credit. If you’re wondering how you might end up with a bad credit score, let me help you by pointing them out so that you stay vigilant and refrain from these deadly mistakes.

Defaults or Late Repayments
Your repayment history, including loan and credit card dues, largely affect your credit score. Each time you miss a payment or default on a payment or even pay after the due date, your lender reports the issue to the credit bureaus, who in turn, knock out a few points from your credit score. The size of the outstanding debt, the number of late payments in the past, the number of days of the delay, etc.  are the factors that help decide how many points you lose from your credit score. Moreover, this information remains on your credit report as a dark mark for a few years. Therefore, you must ensure that you always stick to your repayment schedule. Keep your repayment record spic and span. If you face any temporary emergency that keeps you from repaying your debt in time, contact your lender and work out favorable repayment terms.

High Credit Usage
Credit usage is another crucial factor that can easily hurt your credit health. You must keep your credit utilization ratio within 30% to show that you are keeping your spending within control. If your credit limit is Rs.1 lakh, you shouldn’t use around 30% of it. A high credit utilization ratio indicates that you are overspending, and hence, you might not be able to repay your debt on time. Maxing out on your credit cards or keeping an outstanding credit balance increases the utilization rate and thus brings down your credit score. Avoid this by paying your outstanding balance in full each month. Reduce your credit utilization ratio as much as possible – a credit utilization ratio below 30% is considered healthy for your credit score.

Unsecured Loans
Secured loans are considered to be good loans. They are usually used for generating income or creating assets. Timely payment of these loans increases your credit score since it reflects your trait of using your available credit options judiciously. On the other end of the spectrum are unsecured loans like credit cards that are primarily used to fund personal consumption. If you have too many of such loans, it reflects poorly on your credit behavior. It indicates that you lend frequently and can ding your credit score. Furthermore, unsecured loans usually carry a higher rate of interest, resulting in higher interest payout, and therefore, negatively affects your ability to obtain fresh credit.

Hard Inquiries
When you apply for a new loan or credit card, the lenders conduct a check on your credit report. This is called a hard inquiry. Hard inquiries knock off points from your credit score. When you apply for many credit accounts, each amounts to a hard inquiry. The hard inquiries remain on your credit report for a few years. Many hard inquiries at a time not only reduces your credit score but also indicates that you are too desperate for cash. Lenders will not trust you and reject your credit applications. Therefore, whenever you apply for credit cards, make sure that you spread the applications apart over a long stretch of time.

Lender’s Faults
Often, banks and other financial institutions fail to intimate the credit bureaus about your recent debt settlements. As a result, your closed credit accounts may be displayed as active ones – your previously paid dues may reflect as outstanding ones on your credit report. Thus, your credit report carries incorrect information, leading to a poor credit score for no fault of yours. Therefore, you must monitor your credit report from time to time to make sure that there are no discrepancies. If you ever find one, contact the credit bureau and get it removed as soon as possible.

Opting for Settlements
When you fail to repay your debts in full, lenders might lure you into settling your dues through a one-time settlement. Although it gives you a steep discount on your total dues, the lender reports that settlement to the credit bureaus. Such debts show up with a “settled” tag on your credit report, and they severely impact your credit score. Your bad credit score makes you look like a credit risk due to your failure in repaying your previous debts on time.

A Guarantor of a Defaulted Credit Account
In case you have co-signed, guaranteed or jointly held credit accounts, you should know that you are equally responsible for repaying the borrowed amount. Thus, you will be liable even if the primary applicant defaults on his/her payments, which will not only show up on your credit report but also bring down your credit score considerably. You might even have to pay the due amounts in order to save your credit health. It would be a financial as well as an ethical loss. Avoid co-signing credit accounts. If you already have, then consider getting yourself removed from the account in case the account holder is a major payment defaulter.

To Sum Up
A handful of serious, as well as petty reasons, can change your credit score. Gear up and keep your finances under check. Monitor your credit activities and inculcate responsible spending habits. The Intelligent Finance Tool of mymoneykarma helps keep your finances on track. Why don’t you try it out and enjoy its benefits?