4 common credit score mistakes you’re probably making—And how to fix them | Mint

Maintaining a healthy credit score remains crucial for borrowers seeking loans, credit cards or favourable interest rates. Now, with the Reserve Bank of India’s recent reforms boosting credit reporting transparency, it is crucial to avoid common pitfalls that can negatively impact your creditworthiness.

A credit score is nothing but a numerical representation of a person’s creditworthiness. It ranges generally from 300 to 900. Its calculation is based on factors such as credit history, repayment capacity, repayment behaviour and total debt levels.

Lenders use this metric to assess and understand the risk of lending money or approving credit cards and loans to individuals. These are some factors that cumulatively influence one’s credit score negatively if not managed effectively.

According to Kanika Singh Chief Risk Officer, IMGC, “Excessive credit inquiries, elevated credit utilisation, unresolved outstanding dues, and frequent opening of new accounts are key factors that adversely impact credit scores, thereby affecting loan eligibility, interest rates, and lender confidence.”

Therefore, let us take a look at four common mistakes that can result in lowering your credit scores.

1. Missing or delaying payments

Consistent and timely repayment of EMIs and credit card bills is extremely crucial and paramount. Even a single missed payment or delayed submission can significantly bring down your credit score. As payment history constitutes to about 30-35% of your total credit score. Further, overdue payments can remain on your credit report for years, thus hindering future credit approvals.

2. High credit utilisation ratio

Using more than 30% of your total available credit limit can showcase financial difficulty and strain to prospective lenders. A high credit utilisation ratio adversely influences your credit score and your overall credit profile. It is hence recommended by experts to keep credit utilisation below 30% to maintain a healthy credit score.

3. Applying for multiple credit lines simultaneously

Now submission of multiple credit applications in a short span of time can result in numerous hard inquiries on your credit report. This kind of behaviour also indicates higher risk related to credit borrowing and can lower your score immensely. That is why it is prudent to space out credit applications and apply only when necessary.

4. Closing old credit accounts

It is important to acknowledge the fact that closing long-standing credit accounts such as credit cards, personal loans etc., can shorten your credit history and increase your overall credit utilisation ratio. Further, a longer credit history demonstrates your ability to manage credit efficiently over time, thus positively influencing your score.

Hence, closing instead of closing out unused accounts you should consider keeping them open and using them occasionally. This can go a long way in defining your credit behaviour and overall accountability as a borrower.

Conclusion

Hence, avoiding these common mistakes can significantly boost and enhance your credit score and your overall credit profile. Thus boosting your financial credibility and improving your chances of securing credit on favourable terms in the future.

Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit scores. Mint does not promote or encourage taking credit, as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.