Most of us use credit in some form or another in current times. While we may be using credit cards and getting loans there are small aspects which we may ignore and which can end up harming our credit health. So here are few mistakes that all consumers should avoid. All these have a negative impact on Credit Score and Underwriting Process on the loan applications and one may end up getting rejected and evaluating options on loan for bad credit score.
This is by the far the biggest mistake that can be made by any borrower and yet it might the most common one. Most credit rating agencies use almost similar parameters to calculate the credit score of an individual. The weightage given to each parameter may vary slightly but payment history is definitely the most important factor for calculating an individual’s credit score. Missing a single payment could put you on the loan defaulter list and can immediately impact the credit score adversely. Moreover the default continues to reflect on the Credit Information report (CIR) for a long time. This applies to delays in payments too; missing a payment or being late in making it are both best avoided in case one is looking for a healthy credit score.
One may wonder if I have a credit card and I max it but am able to pay on time then it should not spell any trouble. Though this may sound like the most acceptable thing but it is not so; a high credit utilization is bad for the credit score even if you pay the entire due on time. Credit utilization denotes the ratio of the total credit card billed amount to the sanctioned limit for the card; this is calculated per card wise and also overall. High credit utilization indicates credit hungry behavior and also an excessive dependence on the credit card; both of these are indicative of being a high risk individual. A high credit utilization ratio of more than 40% is likely to impact the credit rating adversely.
Often we may feel that we do not require an existing credit card due to a particular reason or because we have too many of them. Same goes for a loan, we may want to prepay it if we have surplus funds; however old accounts are good for your credit report. A long serviced loan or a credit card with a deep trail give a better picture of your credit behavior, hence it is best to keep them open. Even if you feel that a card is no longer required, you could use it once in a while and then remember to pay the dues on time to keep it active.
A large part of the population (even those who are aware about credit scores) rarely check their own scores except maybe when they are planning to apply for a loan. Checking the report from time to time ensures that you are not only updated about your credit worthiness and financial health but will also know if there is an error in the report. Sometimes due to an error in reporting or oversight there might be a mistake in your credit report which could be harming your score without you even knowing. Checking the report occasionally will help you in being aware of such a situation; in case your are wondering about how to correct CIBIL report, you can simply log on to the website and get started. If there is a genuine issue due to which the score is in the red then it is best to remedy the problem timely.
If you have piled up dues or there is balance that has been pending for a while and you think that settling it with lender can help you then think again. Though it will get the pesky recovery agents and bank of you back and you will not have to pay the entire amount but this could damage your credit score. Settling means paying less than what you actually owe the lender and this is reported to the rating agency. If you are negotiating with the lender then make sure that the payment is not reported as “settled”. A settled account reflects in the report for up to seven years and each time a lender sees it, it will set off alarm bells.
So hopefully you are not making any of the above credit mistakes. Being credit aware is an important step and is essential for being credit healthy.