Find out what secretly affects your credit score. These help you avoid surprises during a credit application.
Credit Score awareness has been a topic of curiosity for credit consumers for decades. Many apply for a credit card, car loan and mortgage; only to get surprised by a rejection.
I see many people who have been good payers and never defaulted in their lifetime, rejected by the institution for a credit product.
How about checking the below facts before you declare your borrowing journey as a dead end.
“The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.”
Higher credit card utilisation
Many believe that spending more on credit cards and paying back big credit card bills, would make them appear pro-payers with the credit bureaus. But that’s not the full story.
A good payment history does improve your score but bills more than 30% of your credit limit, impact your score negatively. To the credit bureaus, it‘s an indicator of the credit neediness of the cardholder.
If you still have the requirement to spend higher, try below –
- Apply for multiple credit cards and do not use more than 30% of the credit limit.
- Check with the card issuer if your credit limit can be increased.
- Get an add-on card from someone in your family who has a higher credit limit and low card usage.
Forgetting to pay the credit card bill /mortgage instalment by the due date
I feel dejected for people who forget to pay their bills. Most defaulters do not have sufficient funds to make their payments on time. But a small group also default because they have been forgetful.
One single payment default can hurt your score for months to come. If you have the funds make sure you pay on time. To ensure paying before the due date –
- Register for auto-payment of card bill, on your bank account.
- Make sure ACH is enabled for your monthly mortgage instalments.
- Consider auto pay for your utility bills as well. Your credit card comes with this feature.
Short-term impact of acquiring a credit product
Your credit score also gets temporarily affected when you are approved for a big loan. It is not limited to a mortgage but also includes a personal loan, student loan or loan on credit card.
However, this is temporary and the score bounces back as you start paying back the instalments. While you need not worry much about it but be aware that this may hinder your plans of applying for a new credit card or credit product in the coming few months.
Acting as a joint payee
How often have you helped a friend buy that iPhone with your credit card and convert it into an EMI? Have you become a guarantor or a joint owner in a loan for a close relative?
While it’s ok to help the ones who take equal responsibility for your finances and burden; doing it for everyone may hurt your credit score.
Remember that, since you are the joint owner of the credit product, any default or missed payments by your friend or relative affects both your scores.
In case, someone has used your credit card for availing EMI on a big expenditure, the impact of a missed payment is borne by you alone.
Some of the tactics that will help you avoid these situations are –
- Learn to say “No”. It is difficult but saves you from a lot of future stress and burden.
- Keep a no-borrow, no-lending policy with your near ones. It will save you a lot of relations.
- Express your situation in detail to the other person who has requested your help. A true friend will always understand.
Closing an old credit product
I had an OCD to discard items, not in use. When it came to a bank account or a credit card that has been inactive for a long time, I would proactively contact the bank and get the account/card closed.
Closing an inactive bank account is fine. Things go downhill when you close one of your oldest credit cards. The length of your credit history is directly correlated to a higher credit score.
Do not close your older credit card unless your new credit card has been with you for 5 years or more. Closing your old credit card, shortens your overall credit history and brings down your credit score