How to avoid five common mistakes that could affect credit score

Ranjit PunjaCreditMantriA good credit score is your passport to a lifetime of smooth access to credit.  Many of us are unaware of how a credit score is computed. We do not even know steps we need to take - and missteps we should avoid - to ensure that we do not damage our score. Here are five common mistakes that are all too easy to make – and are also equally easy to prevent. 1.    Update yourself on your credit score and credit health in general: Being unaware of your credit score is one of the biggest avoidable mistakes. If you are unaware of your cholesterol level you cannot do anything about it. Similarly, if you do not know your Credit score, you will not know if it needs improvement. It is easy to get a copy of your credit report and score from the credit bureau. Check your report for any discrepancies that could be the sign of administrative error or of ID theft and fraud. If you find any errors, file a complaint and get them rectified immediately. Wrongly reported status of accounts or credit limits could unnecessarily drag down your score. Make sure you follow up with the bureau till the change is reflected in your report. 2.    Keep away from high credit utilization: You might think your credit score will not be affected unless you cross your credit limit. That is not the case. If you consistently spend more than 50% of your total credit limit, it signifies to potential lenders that you are ‘credit-hungry’ and raises questions on whether you will be able to repay new debt. Keep your spending to within 50% of your credit limit so that your credit utilization ratio remains low. 3.    Avoid delaying or skipping repayments: Often people are under the impression that missing the odd payment does not matter in times of a temporary cash shortfall, so long as they pay it back later. Remember that every late or delayed repayment is reported by your bank/lender to the bureau. While one or two late payments might not impact your score, a consistent pattern of late or missed payments should be avoided. You can reverse damage to your score by starting to make all your repayments on time and in full right away. If you tend to forget to make payments by the due date, set up email or sms reminders or give standing instructions for the EMI or credit card amount to be deducted automatically. This way you avoid hurting your credit score due to simple oversight. 4.    Do not close old credit card accounts: Often while consolidating credit card debt, people tend to close their old card accounts and retain their newest credit cards. You should do exactly the opposite. One of the factors used in calculating your credit score is the age of your credit accounts – and the older the accounts, the better for your score. This is because lenders want to see a long credit history across multiple accounts to evaluate your repayment record. If you close your old accounts, your credit history becomes much younger and it can negatively impact your score. 5.    Do not apply for multiple cards or loans simultaneously: You might be tempted to apply for various cards or even loans to maximise your chances of being approved by at least one lender. However, every loan or Credit Card application you make is recorded in your credit report, and when lenders see numerous applications within a short period, they again see you as ‘credit-hungry.’  Your application may be rejected and each rejection can adversely impact your score. So apply only to the lender where you think you fulfill the eligibility criteria and stand the best chance of being approved.  These are common mistakes that many people unwittingly make which affect their credit score. It is easy enough to avoid these mistakes with a little effort and awareness, and enjoy the many benefits of a healthier credit score.