Festive season is probably the most eagerly awaited and auspicious time of the year for most of us. But, amidst all the enthusiasm surrounding festivities, it’s important to remain financially disciplined.
With credit score being a crucial part of our financial wellbeing, we must make sure we do not commit the following mistakes which can harm your credit score:
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1. Committing irregularities in repayment of loan EMI and credit card bills
Impulsive purchasing or over spending beyond repayment capacity can jeopardize your overall financial health, and at worse, lead to difficulty in repaying existing debt obligations such as loan EMI and credit card bills on time and in full. Irregularity in clearing financial debts would not only attract penalties, it would also bring down your credit score by a few points.
Keep in mind that lenders prefer lending to those having a disciplined repayment history, and credit bureaus also give maximum weightage to loan and credit card repayment history while computing credit score. Hence, it is imperative to carefully plan your expenses during the festive season and avoid getting carried away by festive deals and offers.
2. Maintaining credit utilization ratio (CUR) over 30%
Most of the card issuers extend special offers and deals to customers during the festive season. While it’s wise to make the most of these offers, make sure you do not compromise on your overall credit card spends. Try to keep it contained within 30% of your total credit limit as anything beyond this limit is treated as a sign of credit hungriness. Banks generally tend to go slow on lending to those who frequently cross this threshold, and credit bureaus too would pull down your credit score by a few points.
If you are closer to breaching this 30% mark or have already breached it, you can either request your existing card issuer to increase your credit limit, or route some of your transactions through your debit cards, to prevent harming your credit score.
3. Not reviewing your credit report periodically
Do not overlook your credit report during the festive season. Given that your credit score is primarily computed on the basis of information captured in your credit report by your lenders, the presence of any incorrect information can damage your credit score. Whether it’s a clerical error on the part of the bureau or lender, or at worse a possible fraudulent transaction, it can only be identified if you periodically review your credit report, ideally at least once every three months. Doing so would assist in timely identification and rectification of the inaccuracies/ errors.
You can pull out one free credit report every year from each of the four credit bureaus in our country. Alternatively, you can stay updated by visiting online financial marketplaces to fetch your free credit reports every month, along with their free monthly updates.
4. Submitting multiple credit applications to lenders within short time span
If you are planning to avail a loan this festive season, or a credit card, make sure you do not submit multiple credit applications, especially within a short span of time. Whenever you submit a credit application to lenders, they assess your creditworthiness by fetching your credit report from credit bureaus. Such lender initiated credit report requests are termed as a hard enquiry by the credit bureaus, and they get listed in your credit report, hence pulling down your credit score by some points.
Visit online financial marketplaces instead of submitting multiple credit enquiries to lenders, especially within a short span of time. These platforms can help compare and choose amongst the most suitable lenders on the basis of your eligibility criterion such as income, credit score, age, job profile etc. Credit report enquiries initiated by such platforms are termed as soft enquiries, which may not impact your credit score.
5. Think through before signing up as a co-signer for loan guarantor
Being a co-signer or guarantor to a loan makes you equally liable for ensuring its timely and regular repayments. Any delay or default would not just harm the credit score of the primary borrower, it can also pull down your credit score by a few points. Hence, you must think well before agreeing to be a co-signer or loan guarantor. Make sure you regularly review the repayment activities in your co-signed / guaranteed loan account(s). Failure to do so can pull down your credit score, which in turn can harm your loan and credit card eligibility, and also reduce approval chances.
(By Radhika Binani, Chief Product Officer, Paisabazaar.com)