There are numerous reasons why your Credit Score could be sliding downhill. Some fairly obvious and common reasons are unpaid loan EMIs and Credit Card bills. However, there are a few others that aren’t particularly well-known but have the potential to damage your Credit Score beyond recognition.
Regardless of what ails your Credit Score, you can always take steps to turn it around. If you are already aware of some of the more common reasons that affect your score, we’ll tell you about 7 more shockingly simple reasons that keep your score from improving.
Additional Reading: Check Your Experian Credit Score For Free At BankBazaar.com
Not checking your Credit Score before applying for a loan or Credit Card
This is among the most common, yet overlooked reasons that can lead to an applicant’s loan or Credit Card application being rejected.
Not many people are aware of the strong influence their Credit Score wields on their application for a line of credit. Hence, they rarely check their score before submitting their application.
A Credit Score greater than 750 can greatly increase the chances of your application being accepted. By checking your score in advance, you can get an idea of what your application prospects might be.
If your score isn’t in the best shape, then it would be advisable to wait for a few months so you can improve it before applying for a loan or Credit Card. The probability of having your application rejected and further harming your score is not worth the risk.
Should you check your Credit Report even if you aren’t looking for a loan or Credit Card? By all means, yes! Typos or wrong information can wreak havoc on your score. Checking your Credit Report regularly is the best way to keep it free of errors.
Additional Reading: Mistakes That can negatively impact your CIBIL Score
Check your payment history
When you get your credit report, make sure that you scan through it thoroughly. You can start by checking your payment history. It has a 35% impact on your Credit Score. And, yes, that’s a big deal.
You may think that a few delayed payments won’t do any harm, but you couldn’t be more wrong. Late payment of Credit Card bills, unpaid loan EMIs, loan defaults etc are common reasons that lead to a sinking Credit Score.
If you are already grappling with a poor score, even the slightest mistake is sure to drag it even further into the mire. And believe us, it isn’t easy to fix a poor Credit Score. It takes months of hard work and some serious penny pinching.
Additional Reading: Terrific Ways To Build Your Credit Score
Credit Utilisation Ratio
Your credit utilisation ratio is another major factor that affects your Credit Score. Although it has an impact of about 30% on your score, most people tend to completely overlook it.
Credit utilisation ratio, or CUR, is the reflection of your Credit Card usage with respect to the available spending limit on your card. For example, if the available spending limit on your Credit Card is Rs. 1 lakh, and you happen to spend Rs. 60,000 per month, your credit utilisation ratio will be 60%. This ratio is used to assess your credit managing capacity and habit.
Cardholders must always strive to maintain a low or relatively low credit utilisation ratio. This is because a high credit utilisation ratio indicates that the cardholder is in a cash crunch consistently or is a compulsive spender.
A high credit utilisation ratio every month denotes that there is a chance that the customer may default on his or her payments, which in turn has a negative impact on the Credit Score. Hence, cardholders must ensure that their Credit Card spending is under control and within the stipulated limit.
A credit utilisation ratio of under 30% is looked on favourably by banks.
Credit Cards should only be used when absolutely necessary. It is easy to rack up debt on Credit Cards if customers misuse their available limits or fail to pay their bills on time. Also, cardholders are advised to not just pay the minimum amount due but to pay the entire debt on time if possible.
Additional Reading: Tips To Improve Your Credit Score
Age of credit lines
Age of credit is the average age of all your currently open loan and Credit Card accounts. It’s good to have a longer credit history as this shows that you have been a responsible borrower. The age of your credit lines has a 15% impact on your Credit Score.
The amount of time you have been using credit is an important factor when it comes to calculating your Credit Score. If you are an individual who has been servicing debt for a longer period of time and making timely payments, it would certainly improve your score.
Avoid closing your old credit instruments unless absolutely necessary. For example, you can use old Credit Cards to pay utility bills every month.
The total count of your open and closed loans and Credit Card accounts also affect your Credit Score. This factor has a 10% impact on your Credit Score. But this 10% can amount to a lot if you already have a low Credit Score. You can ace this section by ensuring that you have a mix of unsecured (Credit Card, Personal Loan) and secured (Home Loan, Car Loan) credit lines.
An individual with more secured loans is more likely to have a positive score compared to an individual with more unsecured loans. An unsecured loan is the most expensive form of credit and the higher the number of unsecured loans, the higher are the payments from them due to high-interest rates. An individual with more unsecured loans is more likely to have a lower score.
Additional Reading: All About Your Credit Score
The count of all the hard enquiries that banks initiate when accessing your profile has an impact on your Credit Score. Make a note that when you inquire about your Credit Score it gets called a soft inquiry and that does not change your Credit Score.
People apply for multiple loans and Credits Cards thinking that more credit means a better lifestyle. This hunger for more credit could impact your Credit Score negatively though. Banks and other financial institutions exercise caution in case of individuals who constantly apply for more credit or who have just been sanctioned a new loan.
This behaviour indicates that the person’s debt burden has increased and they are possibly less capable of honouring any additional debt. Keep in mind that hard enquiries have a 10% impact on your Credit Score.
Negative Status Accounts
It is a count of all accounts that the lender has marked as written off, suit filed, settled, account sold etc. The higher the number of negative status accounts in your Credit Report, the more troubling the story gets for your Credit Score. Not having any accounts under this section is good for your Credit Score.
This segment has a low impact on your Credit Score. A negative remark, however, under it can be detrimental for your future loan or Credit Card applications.
Additional Reading: 7 Ways to Murder Your Credit Score
Being aware of your Credit Score is one of the requirements of a financially healthy lifestyle. Hence, we allow our customers to check their Experian Credit Report for free. Checking your own Credit Score qualifies as a soft enquiry and will not lower your Credit Score.