Practices That Lead To Bad Credit Score - IndiaLends.com

Practices That Lead To Bad Credit Score

A credit score is a numeric expression that helps lenders assess your creditworthiness. This is why it is an important figure in your financial life. Your credit score plays an important role in determining whether you are eligible for any form of credit. In fact, a good credit score can help you save thousands on interest cost. A score of 750 or above is considered a good score and can give you easy approvals. However, as easy it sounds to build your credit score, similarly, you can damage your credit score. Here are a few practices that can lead to a bad credit score:

Frequent Defaults or Late Repayments of Debt

Did you know late payments and default can drop your credit score by 30 points? The most important determinant for calculation of your credit score is your payment history. It comprises 35% of your credit score. This is why it is important to make your payments on time and in full. The effect of defaulting your payments depends on the amount outstanding, the number of days you are late from your due date, and if there are any late repayments in the past.

High Credit Card Utilisation Rate

When you are assigned a credit limit, you are expected to use the limit responsibly. However, if you use most of the credit limit to you, this directly does not affect your credit score but reflects your credit hunger behavior. This means the lender does not have an impression of you being a responsible customer.

Moreover, maxing out your credit limit increases your credit utilization ratio which is another important factor for the calculation of your credit score. The ratio is calculated by dividing the total outstanding debt by the total credit limit. Ideally, the credit utilization ratio should not exceed 30-40% of the total limit. In order to not let your credit card utilization ratio increase, you must increase your credit limit. This could be either by increasing the limit on your existing credit card or owning multiple credit cards.

A high percentage of unsecured loans

An unsecured loan is a type of credit that does not require any type of collateral. Although this has more weight when compared to other forms of credit, having a high percentage of unsecured loans can again reflect you as a risky customer.

Having a good credit mix is the key to keep your credit score in a good position. Apart from just having unsecured forms of credit such as credit cards and personal loans, you must also have a good proportion of secured forms of credit such as home loans, auto loans, etc.

Too many credit inquiries

When you are in need of a personal loan, it is normal to apply at too many institutions to increase your chances. However, this comes out as a surprise to you that applying at too many institutions simultaneously does the exact opposite. Instead, this affects your credit score and therefore reduces your chances to get easy approvals.

When a lender pulls your report to check your credit score, it generates a hard inquiry and multiple of them can drop your score by a few points. Instead, you can apply online at digital lending portals where you just need to fill one application and as per the information provided by you, you can find the best lender.

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Lender’s failure to report your debt repayments

What if you made your payments on time but your lender does not report the same to the credit bureaus? Or if your payment was not recorded by the bank properly, and the bank thinks that you didn’t make the payments at all? This by no doubt will drop your credit score. As mentioned above, this will reflect on your payment history and by now we know the importance of payment history in the calculation of your credit score.

This is why you should check your credit report regularly and check for any errors if any. If you see any error, you must report it immediately and avoid further damage to your credit score.

Opting for a settlement instead of repaying your debts

Unfortunate instances can happen to anyone and can never be forecasted. A loss of job or medical emergency, if not planned beforehand can lead to default in payments. In such times, opting for a settlement instead of planning a way to repay your debts can affect your credit score adversely.

A settlement mark stays in your credit report for a period of 7 years and as the mark ages, the effect reduces. This means your future loan possibilities will be compromised for a longer period if you settle.

Default in accounts where you are a co-signer or a guarantor

When you sign in as a guarantor or a co-signer, you are equally responsible for the debt taken by the main applicant. Therefore, any default in the payments made towards the loan can result in a drop of your score. This is why it is important to be sure who are you helping. Always assess the creditworthiness of the main applicant before you partner in as a co-signer or a guarantor.