Why my Credit-Score going down
You may have heard that it is important to maintain a good credit score so that not only is it easy for you avail loans and other similar products when required but you also have emergency access to liquidity whenever required. However, ignoring certain details may result in a drop in your credit score and hence it is important to be aware of these details so that there is never a dip in your credit score.
We will have a look at some of the reasons due to which there can be a drag in your credit score.
Top 8 reasons for bad credit score
- Not having a credit history: Not having a credit history may result in your credit score dropping. If you are someone who has never availed any form of a loan or had a credit card may cause your credit score to drop and make it difficult for financial bodies to determine whether you fall under the high-risk category or low-risk category. Hence, it is always recommended that you do make use of available financial products at your disposal and ensure that you never default on your payments so as to improve your credit score.
- Having only one credit card: It is recommended that in order to build a good credit score you have more than one credit card so that you can show your creditworthiness and improve your credit score along the way. You must not make all your purchases from only one credit card as it may lead to a high utilization ratio. However, if you have more than one credit card, it is important that you repay the credit card amount to the bank on time as any delay in your payment may lead to a drop in your credit score.
- Delaying your credit Card Payments: Never ever delay in making your credit card payment. Once you delay the payment of your credit card bills, your credit score will drop. You must also not make the mistake of only paying the minimum amount for the reason that doing so will result in your credit score plummeting to new lows within months. You must also ensure that your account is well funded on the EMI due date as your credit score can drop severely if your EMI bounces.
- Having a high credit utilization ratio: Your credit utilization ratio is nothing but the ratio of credit availed to the available credit limit. For example, if the credit limit of your credit card is Rs.1 lakh and you have availed Rs.40,000 out of it then your credit utilization ratio will stand at 40%. Similarly, if you have 3 credit cards with a credit limit of Rs.50,000, Rs.1 lakh, and Rs.1.5 lakh respectively, out of which you have availed Rs.90,000 then your credit utilization ratio will be 30%. Hence, most of the financial advisors suggest that you must maintain a low credit utilization ratio and is 30% and below. Having your credit utilization ratio 30% and below will result in an improvement in your credit card score.
- Increase your credit card limit on a frequent basis: Do not increase your credit card limit on a frequent basis as it may suggest that you are dependent on your credit card to maintain your daily expenses which not only would drop your credit score but also make it difficult for you to avail a loan in future as the lender may find it difficult to calculate your net worth before sanctioning your loan application.
- Delaying in closing your loans: If you have previously availed any loan and has delayed in repaying it, ensure that you close your loan and repay the existing loan balance before applying for a new one. Defaulting on the payment of your loan may result in your credit score dropping. You must ensure that you do not partially settle the loan amount for the previous loan as it would severely affect your credit score. You must ensure that the loan is repaid, and you close it completely by getting the formal closure certificate from the bank before you apply for a new loan.
- Having a credit report filled with error: If you are someone who does not read your credit report on a frequent basis then it is time that you do. Sometimes, there can be an error made in your credit report such as default in your payments despite the fact that you may have never defaulted in making your payment or something as minute as a mistake in your name. These errors can cause your overall credit score to fall and hence it is recommended that you at least check your credit report on a quarterly basis. In case of any error in your report, you must immediately get it fixed by visiting the credit bureau’s website and filling a resolution form. The bureau would look into it and fix the errors in your report.
- Applying for multiple loans and credit card: Earlier it was mentioned that it is recommended that you have at least 3 credit cards so as to maintain a healthy utilization ratio. However, do not go on a spree of applying for multiple credit cards and loans as it might be a red flag for lenders and give them the impression that your debt burden may have increased which will severely affect your credit score. Hence, apply for a loan or a credit card in moderation. Make sure that you apply for loans and credit cards in moderation so that you are capable of clearing the bills on time.
These are some of the habits which if not kept in check may severely hamper your overall credit score. Be smart about your needs and accordingly apply for credit card and loans so that you can not only meet your expenses but also repay the bills on time and duly improve upon your credit score.