Personal Finance: Five reasons why your credit score can turn bad

A poor credit score can become a hurdle in availing credit products like loans and credit cards, and can stand in the way of fulfilling lifegoals like buying a house.

Bad habits are often hard to change, but if such habits are spotted in time and replaced with a good habit, it can result in beneficial transformations, steering you towards a better future.

This holds true not just for bad habits in general but also for financial indiscipline, which could lead to a poor credit score.

Generally, a low credit score is not the result of a single financial mistake but reckless handling of credit for several months. A poor credit score can become a hurdle in availing credit products like loans and credit cards, and can stand in the way of fulfilling lifegoals like buying a house. Even if those with damaged credit are able to access credit, interest rates are likely to be significantly higher.

The only way to overcome bad financial habits is to identify such practices and correct them at the earliest. So let’s find out what are these bad practices that lead to poor credit scores.

Not paying your bills on time

To present yourself as a responsible borrower, you need to pay your loan equated monthly instalments (EMI) and credit card bills in time. Any missed or delayed payments can pile up hefty late payment fees and finance charges, making it more difficult to clear the dues. Late payments show up in the days past due (DPD) section of your credit score, indicating the number of days by which the payment has been delayed.

For example, if your payment was delayed by 10 days in November, it would indicate ‘10’ in the column for November.

To change this habit and ensure that you clear all your dues on time, you can set up a standing instruction (SI) or auto-pay facility with your bank. If not, setting reminders for multiple due dates could also be helpful.

Applying for multiple loans and credit cards within a short span

Loan or credit card applications are considered as hard enquiries by credit bureaus, which result in a temporary drop in your credit score. When you apply for multiple loans or credit cards in short duration or simultaneously, it could lead to a considerable drop in the score and, at the same time, make you seem ‘credit hungry’, which is a sign of risk for any lender.

Therefore, do thorough research, check your eligibility and apply for one offer at a time. If your credit score does suffer due to multiple applications, maintain a gap of three to six months before making your next application, and that too only if you really are in need of credit, otherwise avoid making applications until you build a healthy score.

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Closing your older credit account

Older credit accounts signifies your experience in handling credit. The older the account, the longer is your credit history.

However, when you close an old credit card account, it could lower the average age of your credit history, which may impact your credit profile. Hence, instead of closing an old credit card account, for example, you can choose to upgrade to a card that better matches your spending preferences.

Also read | Do you exhaust your credit card limit often? Your credit score could come under pressure

Not monitoring your credit report periodically

A credit report helps lenders, including banks, non-banking financial companies, housing finance companies (HFCs) and credit card companies assess your creditworthiness and repayment capacity. Therefore, to maintain a good credit score, you need to ensure that your credit report is error-free. Any error, minor or major, if unnoticed for a prolonged time, can drastically lower your credit score. To avoid any dip in your credit score, you need to regularly check your credit report for anomalies and resolve them at the earliest by raising an online dispute with the respective credit bureau.

Also read | Want low home loan interest rates? A good credit score helps

Becoming a loan co-applicant or guarantor, casually

Before becoming co-applicant for a loan or standing as a guarantor, make sure to read all the loan-related terms and conditions. This is because in case the loan applicant defaults in paying the outstanding amount, then the co-applicant or the guarantor has to repay the balance loan amount. If this happens, your credit score takes a huge dip, which could take months to recover. Before choosing to become a guarantor, ensure that the person you are becoming a guarantor for is a responsible borrower.

Reckless use of credit can cause countless financial issues, which could not only reduce your credit score but also make it difficult for you to secure credit in case of an emergency. If you are already facing a debt spiral, try to find ways to consolidate your liabilities. For instance, if you are able to pay only the minimum due on multiple credit cards, the balance will continue to add up. You can consider taking a personal loan to consolidate multiple debts.

Taking small steps towards becoming a responsible borrower will go a long way. With disciplined use of credit, you can build a good credit score and improve your chances of approval for loans and credit cards.