The need for availing of a loan arises significantly when financial emergencies strike, but it isn’t always easy to find a good lender to get a loan. For most lenders, getting a loan demands the submission of several documents, prerequisites, and long procedures. One important and mandatory thing needed is a strong credit score. But what is it?
Your credit score is a three-digit number that can range anywhere between 300 and 900. A higher number indicates better creditworthiness. The lending organization will evaluate your credit score to decide if you qualify for a loan or credit card when you apply for one.
It takes careful money management and attention to detail to keep credit score mistakes at bay and maintain it on the higher side. Unfortunately, even the most knowledgeable buyers occasionally make errors that lower their credit rating. Thus, preventing mistakes and exercising caution while going in for a loan is advisable because establishing credit is time-consuming.
Here are five credit score mistakes that many people may commit. You can prevent an unwanted fall by being aware of these important credit score guidelines.
A poor credit score results from missed credit card or loan EMI payments. While one or two late payments might not significantly impact your score, frequently skipping payments over an extended period will inevitably negatively affect your credit score.
You can always opt for automated bill payments or give your bank a standing instruction to debit your savings account on or before the payment due date. This avoids any delays in paying your credit card dues or loan EMIs.
Your score will certainly suffer if you often miss payments on your bills. This is because your payment history is a key component in evaluating your credit score. You might be surprised to learn that a single missed payment can ruin an otherwise excellent credit score. If you mistakenly miss a payment but otherwise have a good credit history, get in touch with your lender and ask to have the error cleared from your file. Your lender will probably agree if it's your first significant error and you've been a good customer otherwise.
If you have multiple loans and credit card applications, it creates an impression that you are credit-hungry and in need of assistance with your finances. Your credit score may suffer when lenders ask for a copy of your credit record or score. So, you should refrain from making numerous credit card or loan applications. As per credit score guidelines, it is recommended you wait at least three to six months before reapplying when a lender rejects your loan or credit card application.
Not only is exceeding your credit limit bad for your budget, but it can also lower your credit score. Your credit usage ratio—the percentage of available credit you're using at any one time—is one of the things lenders consider when evaluating your creditworthiness. Even if you eventually manage to make all your payments on schedule, a credit usage ratio that exceeds 30% might truly raise a red flag.
Let's understand this through an example. Suppose you have two different credit cards with a total limit of Rs. 1 Lakh, with one having an outstanding balance of Rs. 50, 000 and the other having a balance of Rs. 0. You can calculate the credit utilization ratio by dividing the total outstanding amount on both cards, which is Rs. 50,000 by the total credit limit on the cards. In this case, 1,00,000 / 50,000 x 100 = 50%.
This means that you are using half of the total credit that's available to you. This ratio is also calculated per card and is known as the per-card ratio.
Each lender has different cut-offs as their ideal credit utilization ratio, but it is recommended to have it below or equal to 30%. This means that if your total credit limit is Rs. 1 Lakh, your total outstanding amount should not exceed Rs. 30,000.
Keep in mind that what matters is how much of your available credit you utilize, not how much actual debt you are carrying.
Your credit score could suffer if you tend to take on excessive debt, particularly unsecured loans. A significant amount of overdue debt suggests a weak ability to make payments and a high chance of default. In addition, your credit score, and prospects of getting authorized for new loans and credit cards will often suffer if your total monthly debt repayment (EMIs and credit card dues) exceeds 30%of your net monthly income (NMI).
Here are some suggestions for raising your credit score but bear in mind that these strategies can take some time to bear fruit. Your credit score must be improved or restored over time.
If you're one of the many customers with good credit, you should enjoy your success, but don't get overconfident. Sometimes, it only takes one error to reduce a stellar grade to one that is mediocre or bad. Simply follow the credit score guidelines if you want to maintain your credit, and you should be good to go.
Financial institutions like Poonawalla Fincorp offer loans at low-interest rates with minimum documentation for good credit score customers that will help you easily reach your milestones without worrying about anything.
You can also check your credit score in just a few easy steps. Even if you are not well-versed in the complexities, the Credit Report offered by the credit bureau is simple to grasp. Additionally, you learn how to raise and maintain your credit score.
Poonawalla Fincorp can help you check your score and take the first step towards getting a loan for your dream home, vehicle, or any asset! If you want to learn more, check out these Tips to Improve Your CIBIL Score
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