Mistakes That Can Decrease Your Credit Score

Do you know several factors that can affect your and your business’s credit score? Do you know how creditworthy you are to lenders? Many come to know about their bad credit rating when they are refused a loan or have to pay a high-interest rate for a business loan. What can you do about it? Let’s take a closer look at what a credit score is all about.

Your credit score is a three-digit-long figure that works as a determining factor of your creditworthiness. It reflects how credit-risky you are to the lender at the time of your business loan application. It is wise to check your credit rating every six months since it helps when you need to borrow money in an emergency.

A credit score of 750 or higher is typically considered optimal by lenders like banks and non-banking finance companies (NBFCs). Higher scores may indicate that you pose a lower risk to bank officials or lenders. An Indian corporation called TransUnion CIBIL (Credit Information Bureau India Limited) maintains credit information. The CIBIL score determines a person’s creditworthiness.

It is also vital to know how your credit score can be affected, how it can impact you, and your chances of securing a business loan. An applicant with an appropriate credit score will have an easier time getting a business loan approved and will have a bigger credit limit than someone with a lower credit score. The need of the hour is that you need to maintain it at a reasonable number.

Here are a few common errors that can harm your credit score. 

Inability to pay the business loan EMIs or credit card dues

Since all credit bureaus keep track of your payment history, your credit score suffers if you fail to make or delay loan repayments or credit card payments. One or two late payments won’t influence your credit score. However, regularly delayed or missed payments may lead to a dip in your credit score significantly.

Maintaining a high credit use ratio

Your spending pattern also impacts your credit score. Your dependability on credit determines how you are as a customer. A bank or lender may be concerned that consumers who use excessive credit may have difficulty repaying the loan.

For instance, your credit use ratio will be more than 50% if you have a credit card with a limit of Rs 1 lakh and spend close to Rs 55,000 monthly. Your credit score will drop as a result of this persistent behaviour of yours.

Applying for business loans frequently

Your credit report shows the details if you have applied for loans from several financial institutions. This may lower your credit score and give you fewer negotiating options. So, make sure you do not take unnecessary loans or credit to maintain a credit score that will help in times of need.

Closing old but active credit cards

You may lower your credit score by closing your oldest account, which will support the tenure of your other credit accounts. Additionally, closing your old record may reduce the amount of credit accessible and hamper your credit use percentage. So, customers should avoid closing their old accounts as those accounts indicate their long association with the lenders. It shows that you have operated and managed accounts for a long time, increasing your creditworthiness.

Failing to report fraudulent charges on credit cards

Loan applicants and credit card holders usually assume that their credit score is good when they make regular payments on loans or credit cards. However, you must properly check your credit reports for any discrepancies. Credit reports may often contain inaccuracies, resulting in lower credit scores. These can be mistakes by credit bureaus or cardholders’ failure to update their records after any address or name change. If there is any fraudulent or erroneous levy, it has to be reported by the cardholder immediately. Nonpayment or postponement of such inaccurate or fraudulent charges without reporting or explanation will adversely affect the cardholder’s credit score.

Co-signing loans or business loans

Sometimes, co-signing loans may affect your credit score as the chances of misuse increase, the borrower misses some payments, and late payment issues can arise. These can potentially harm your credit score with no direct fault of yours. 

Availing of multiple unsecured business loans or credit cards

Multiple unsecured loans can indicate that a person is already heavily in debt, which increases financial risk. Aside from credit scores, authorities consider unsecured loans to be granted based on income and spending habits. While you may raise your credit score with the help of secured loans like a home loan or a loan against property, many unsecured loans will lower them. Around 10% of the credit (CIBIL) score is determined by the sort of credit you have.

You fail to pay your government’s applicable taxes

The government is not the only party affected by your failure to pay taxes. The government may impose a tax lien on your property if you owe back taxes, which could harm your credit report.

Making the only minimum credit card payment due

Cardholders are getting two different charges listed on their credit card statement. One represents the total amount owed for the preceding billing cycle, and the other represents the minimum payment required if the cardholder fails to pay the balance due. If the cardholder pays the minimum amount due, they may use the credit facility until the immediate credit statement is issued. Interest is charged to the cardholder on the unpaid debt from the previous month. In addition, paying only the minimum is detrimental to your credit score. Regularly paying your expenses is good, but only doing the bare minimum is not. It will raise your overall credit utilisation rate if you only pay the minimum balance. 

Low or zero credit history

The duration of your credit history determines 15% of your credit score. It may affect your overall credit score if you have no credit records or have taken minuscule credit vis-a-vis your credit limit. Remember, lenders prefer customers with prior credit history.

Try to have a routine review of your credit score

It is a best practice to regularly check your credit score as some mistakes from the lenders or the bureaus can negatively affect your records. Remember that if you examine your credit report, it is a “soft inquiry” and won’t impact your score. However, a mistake that sneaks into your credit report unnoticed could significantly negatively affect your score.

Also, keep track of your bounced checks and other poor money management practices, as that might impact your credit score.

A well-maintained credit score is a consequential rating provided by the credit information bureau that determines your creditworthiness. You have to maintain and develop your credit score regularly. Just concentrate on paying all your payments on schedule and maintaining minimal amounts. Additionally, don’t feel bad if you’ve already committed any of the abovementioned faults. You can always rectify mistakes to uplift your credit score over some time. By ensuring financial discipline, you can ensure better creditworthiness.

Read More:

Check Cibil Score By PAN Card

What is Days Past Due(DPD) in a CIBIL Report

Ideal CIBIL Score for Obtaining a Loan

Company Credit Report (CCR)

Experian VS CIBIL

What Affects Your CIBIL Score?

Credit Card Payments Impact Your Credit Score