Your credit score is a significant indicator of your financial health. A high credit score makes you a low-risk borrower, opening up a lot of loan options at best terms for you. On the other hand, a low credit score makes you a high-risk borrower, limiting your chances of getting a loan approved.
Therefore, developing good credit habits to build, improve and maintain your credit score is crucial for your financial health. It is equally important to avoid common credit mistakes that can slow down your progress and damage your credit score for years to come. Here are some common credit mistakes you should avoid:
1. Not checking your annual credit reports
Your credit report could have wrong information that you might not be aware of. This can harm your credit score. Therefore, make it a rule to get credit report at least once every few months and review it for its accuracy. If you spot any errors, raise a dispute immediately and get them resolved.
2. Only paying the minimum balance each month
If you keep making minimum due payments on your credit card each month, you carry your existing balances over to the next month. When you roll over your balances to the next billing cycle, you accrue more interest, and your outstanding keeps increasing. This means more money for your credit card company. However, if you pay more than the minimum balance, you will have greater control over your finances and avoid costly interest.
3. Making a late payment
Your repayment history has a big impact on your credit score. A single late payment can cause a considerable drop in your credit score. If you are slapped with a late payment on your credit report, it stays on the report for at least seven years. Therefore, always ensure that you make your payments timely. Consider setting payment reminders or autopay through your bank account.
4. Using a credit card for everyday items
One of the most common credit mistakes people make is using a credit card for all their purchases. Unless you pay your credit card balance in full each month, this is not a good strategy. If you want to keep your spending under control, keep your daily, everyday expenses off your credit card balance. There’s absolutely no reason to incur interest on items you can easily buy directly with cash or your debit card.
5. Getting tempted into buying something you don’t need
There are times when we see a great discount, the temptation gets the better of us, and we end up buying something we don’t even need. Before making a “great deal” purchase, think it through. To save ₹500, you might end up spending ₹1,000. Do you really need it? If there is a slight hesitation in your answer, don’t go ahead with the purchase.
6. Taking out a cash advance
Taking a cash advance from your credit card is dangerous. Unlike regular credit card purchases, you start accruing interest on the borrowed amount as soon as you make the withdrawal.
Taking a cash advance from your credit card is dangerous. Unlike regular credit card purchases, you start accruing interest on the borrowed amount as soon as you make the withdrawal.
Taking a cash advance from your credit card is dangerous. Unlike regular credit card purchases, you start accruing interest on the borrowed amount as soon as you make the withdrawal.
7. Co-signing with someone you don’t trust
When borrowing a loan, make sure that you choose a repayment schedule that works best for you. If you don’t have a lot of money at your disposal each month, choosing a longer loan tenure makes sense. This will ensure that you pay your EMIs comfortably, without the fear of default.
8. Closing old credit cards
Having multiple credit cards (in good standing) helps lower your credit utilisation ratio and increase your average credit length. So even if you are not using these credit cards, don’t make the mistake of closing them. Keep them open and be wise about using them smartly.
9. Applying for too many credit accounts within a short period of time
Every time you apply for any credit account, your credit score takes a dip. That’s because, with every credit application, your potential lender pulls up your credit report to check your creditworthiness. This is registered as a hard enquiry. Too many hard enquiries can harm your credit score and potentially make your lenders suspicious about your credit behaviour, leading to possible loan/credit rejection. Ensure you apply for a new credit account only when you genuinely need it.
10. Focusing on paying off too many debts at once
Every time you apply for any credit account, your credit score takes a dip. That’s because, with every credit application, your potential lender pulls up your credit report to check your creditworthiness. This is registered as a hard enquiry. Too many hard enquiries can harm your credit score and potentially make your lenders suspicious about your credit behaviour, leading to possible loan/credit rejection. Ensure you apply for a new credit account only when you genuinely need it.
The Bottom Line
It’s mostly a love-hate relationship with credit. We love the fact that it’s easy and always within reach. But we hate the fact that we end up spending money that we don’t have. That said, credit is a fantastic tool that you can use to your advantage. But if you are abusing credit or using it mindlessly, it can get you in financial trouble. So make sure you don’t make the above credit mistakes and use your credit wisely.
