Mistakes to Avoid When Building Credit History

If you want to be responsible towards your financial security, then it’s important that you build a high credit score with the help of good credit history. However, in that endeavor, you want to be careful with your actions and avoid the common mistakes that people commit only to hurt their score. These are:

1. Closing Old Accounts

It’s true that with few bank accounts and credit card accounts you can manage your finances easily and get the desired results faster. However, if you have to close a few accounts, then picking the old ones can do more harm than good.

Here is the thing- the length of credit history plays a huge role in your credit score calculation. In other words, your oldest accounts make a bigger contribution towards your score in comparison to your recent accounts. So, if you have to close an account, it’s best to choose one that’s relatively new.

2. Late Payments

Late payments, whether we talk about personal loans or credit cards, are never good for your credit rating. In fact, the majority of top credit bureaus such as TransUnion CIBIL, Equifax, High Mark, etc. give the highest weightage to the payment history when calculating your credit score. So, if you miss only a few payments, then your credit history will stay good. However, if you fail to make the payments on time more often than not, especially in multiple accounts, then you can expect a huge damage to your creditworthiness.

3. Increasing Credit Utilization

You may have a reason to believe that increasing credit card usage i.e. credit utilization can help to build a high credit score faster. On the surface, that seems logical, after all. However, that’s not how the system works.

Higher credit utilization doesn’t have any impact on the credit rating growth. In fact, if it’s above 35%, then it can easily cause damage instead. This is because the credit rating agencies associated high credit utilization with “credit hungry” behavior. In other words, they are led to believe that the user isn’t financially reliable which is why they are utilizing a large portion of the credit available at their disposal.

4. Carrying Credit Card Balance

A lot of people don’t know exactly how the “minimum payment” feature of credit cards work. They just assume that everything is fine as long as they make these payments.

In theory, minimum payments are a good option. After all, you don’t have to pay any fine and so your credit score shouldn’t be hurt either, right? Wrong!

It’s true that by making minimum payments you can prevent the penalties and/or extra charges. However, you may still suffer in the long run. This is because when you make a minimum payment, your balance amount is carried over to the next month and becomes debt. So, if you continue making minimum payments again and again, your total debt will increase which not only gives rise to financial challenges but also impacts your credit score calculation.

5. Failing to Monitor Credit Report

When people want to increase their credit score, they often to their friends and relatives for guidance. If they are lucky, they get some valuable insight and tips such as expanding the credit variety, timely payments, the option of secured credit cards, etc. However, a lot of times they don’t get to learn about the significance of credit report monitoring.

If your credit report has discrepancies, then the credit rating agencies will continue to give you a poor score even if you are making all kinds of efforts. Plus, you can’t monitor your progress unless you monitor your report and actually measure the impact of your actions.

All the credit rating agencies in India are required to provide every user a free credit report once every year. Thus, there is no reason for you to not get yours.

Building a good credit history isn’t too complicated or difficult. However, having sound knowledge of the same is the key. In that regard, the mistakes explained above can be of great help to you. Good luck!

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