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!

Advertisements

Length of Credit History vs. Late Payment History, where do you stand?

All of us would have had history as a subject in school. And many of us would also have cribbed about why to learn about something that has gone past. However, the fact is that history is something that all of us have a lot to learn from. We can improve our present by reviewing our past. Goes without saying that our present is an outcome of our actions in past and studying our past does help us in taking better decisions at present.

You must be wondering how is this related to your credit profile. It indeed is. There are two important historical trends that make or break your credit score. In fact these two have the potential to either put you at a position where you are able to save lakhs of rupees or can become part of the loan defaulter list. The two important historical trends that we are referring to here are “length of credit history” and “late payment history”. Let us look at these two important aspects and how do they impact your credibility.

Length of credit history

The length of your credit history means that how long you have been holding a trade line. This is one of the most important aspect reflecting on your credit report that makes your healthier on credit front.

To explain it better, let me put you in a situation. Two known people approach you for Rs 10,000 each. One of them has been known to you for a few years now and you are aware of his history of borrowing money  few times and also about his commitment to repay as soon as the salary gets credited. The other one is a new acquaintance who has joined office about 2 months back and you do not have much awareness about his past. Who would you be comfortable in lending your hard earned money? I am sure your answer would have been the first one.

Similarly the length of credit history reflecting on your CIBIL report helps in establishing a comforting factor with the underwriter of the lending institution. A person who has enjoyed credit facilities from various banks for years v/s a person who is new to credit makes a lot of difference in the process of evaluation.

But the loans keep getting closed over a period. The fact also remains that you would want to pre-close it in case you have some funds available with you. So how to manage the length of credit history? Do not close that old credit card that you may feel has become obsolete in terms of its features. Continuing with that credit card will only help in keeping your credit scores healthy.

Late payment history

While the underwriter evaluates your loan application, the way you have managed your credit in past becomes the single most important factor that can lead to approval or rejection of the application. How have you faired against the payments would lead to impacting the outcome.

Again referring to the above example, if the first person who you had known for a few years had only paid other friends after some follow up or has had defaulted on even one friend’s loan (while paying the others in time) you would be skeptical on extending him with financial help. Just like you, even the structured lending institution would be apprehensive of giving a line of credit to an individual who has had default reflecting on the bureau report. Thus it becomes very important that all loans and credit card payments are happening in time without any delay.

Your length of credit and your repayment history are the two most important pillars of your credit profile and must be maintained. In the absence one may not have access to funding at the time of need.