This article is authored by Rajiv Raj, Director & Co-Founder of CreditVidya.
Over the last few years, lenders have been resorting to the CIBIL score to analyse our ability to avail of and repay a loan. Higher the score, the better the chances to access credit at attractive rates of interest. This score is determined by the Credit Information Bureau Limited, or CIBIL. It is India’s first credit information company founded in 2000.
Here is a list of some common credit mistakes to avoid so that your CIBIL score does not drop.
1) Paying only the minimum amount due on your credit card
With a credit card, you are permitted to pay just a minimum amount every month regardless of your actual bill. Many view this as easy credit and find it unnecessary to pay the entire amount due. Paying only the minimum amount due is a mistake that you must avoid. Debt on a credit card is the most expensive form of debt. You will eventually end up paying a huge amount in interest if you rollover balance on your credit card every time. Revolving your credit can and in most cases leads to a debt trap.
2) Utilising higher credit card limits
With increased credit limit many of us go overboard. Avoid any offers of an increased credit limit. Secondly, control your utilisation. For example, if you have used Rs 70,000 out of a credit limit of Rs 1 lakh, that puts utilisation ratio at 70 %. Utilistion of over 30% is viewed negatively by loan providers. Your CIBIL score is also arrived after taking into consideration the credit utilisation ratio of your debt to the available credit limit. The higher it is, the more your CIBIL score get negatively impacted, even if you are making the minimum amount due payment every month.
3) Increasing the loan tenure for lower payments
In case one is unable to meet up the cost of the equated monthly installment, or EMI, stretching the tenure of the loan seems to be the best possible solution to everyone. This provides some temporary relief but you overpay on your loan by increasing the tenure. Take a closer look at your expenses. Curtail extra costs that are not necessities. Make an attempt to meet your EMIs. This will eventually help you to save a considerable amount of money that you would have lost on extra interest payments. Keep increasing your tenure as the last option!
4) Closing your oldest credit card account
The length of your credit history also determines your CIBIL score to an extent. The longer it is, the better. If you cancel your oldest credit card account it would affect your CIBIL score negatively. Avoid cancelling your account, especially when it is a clean one with a good repayment track record.
5) Not accessing your CIBIL report
Most people assume that they are maintaining a good score. But incidences of identity theft are on the rise and someone could apply for a loan on your behalf. The lenders raise enquiries in your CIBIL report every time a loan or credit card is applied for in your name. If you access your report from time to time, you would know if the enquiries are genuine or fake. In the case of a fake enquiry, you can dispute the request by visiting the ‘Dispute Resolution’ page on CIBIL’s website. Accessing your report once a year is a must!
6) Choosing a credit card only for the rewards programme
Rewards programmes make sense only when you do not carry balance on the card. Otherwise, the rising balance along with the interest will far outweigh the benefits of the rewards.
7) Not reading the fine print of the introductory offers
Credit cards come up with introductory offers like 0% or low rate of interest. Read the fine print. The tiny text carries a lot of information such as when the offer expires and the percentage of interest rate to be levied thereafter. In most cases, the introductory rate is for balance transfer amounts or new purchases. But they last only for a certain time frame.
8) Having just one form of credit
While evaluating your loan application, lenders take a look at your CIBIL report and score. You can improve your score by maintaining a healthy mix of credit such as a home loan, auto loan and a couple of credit cards. If you only have credit cards and personal loans-which are unsecured debts, it may affect your chances of any other loan approval since the lenders perceive you as a high-risk customer. Hence, it becomes vital to have a healthy mix of secured and unsecured debts.
