Five common mistakes that are hurting your credit score
If you’re seeking finance for any reason, whether it’s for a new home or an upgraded set of wheels, having a good credit score will help. A higher credit score increases your chances of being approved for credit and makes you eligible for more competitive interest rates than borrowers with poor credit. Generally, if you pay all your bills on time and don’t have excessive debts on your hands, you’re likely to have a decent credit score. Still, it’s helpful to understand the factors that might jeopardise your credit score, so you can avoid accidentally bringing it down. Here are a few things to watch out for.
- Not making timely repayments
If you fall behind on your loan repayments or don’t pay your credit card and utility bills on time, this information will be listed on your credit file, and can bring your credit score down. Not making your home loan or car loan repayments for several months might also lead to foreclosure of the secured asset (such as your home or your car) in some cases.
If you think you can no longer afford a loan you previously took out, consider speaking with your lender to see if you can apply for a hardship variation. If you only want to reduce the monthly repayments, you could consider refinancing to a lower rate or increase the loan term to reduce your monthly outgoing. However, paying your loan over a longer term could see you paying more in interest over the years.
- Making multiple credit applications in a short period
There’s nothing to stop you from applying for a home loan with two or more lenders. You can even apply for a credit card with multiple providers. However, depending on your situation, making numerous credit applications too close to each other can reduce your credit score.
Typically, each new application you make for a loan or card is recorded on your credit report. When you make multiple applications in a short span, it might look like you’re desperate for credit, which could impact your creditworthiness by reducing your credit score.
- Not having a credit history
This might sound annoying, but you kind of need a credit card to get a credit card!
Well, we don’t mean it literally, but if you don’t have any active lines of credit, your credit history is likely to be blank, resulting in a poor credit score. While paying with cash or debit cards is a personal choice, it doesn’t help you establish a credit score. One obvious solution is applying for a credit card, but you will need to be careful about how you manage it. If you’re not confident about budgeting, you could consider a card with a lower limit, and put your credit card bill on auto-debit to avoid missing any payments.
- Closing an inactive credit card
Closing a credit card that you’ve used responsibly for years and paid off regularly might not be a great idea. Even if you don’t use the card anymore, it continues to provide evidence of your creditworthiness on your credit report. By closing off accounts with a steady repayment history you’ll remove them from your file. At the same time, having multiple sources of credit or an overall high credit limit might be a red flag for some lenders. You really need to strike a balance between these two aspects to improve your credit rating.
- Having your partner default on a joint loan
If you and your partner have shared debts, a default by either of you is likely to impact the credit scores of both. It’s important to understand the risks and benefits of joint credit, and to have reasonable trust in your partners financial management before taking on a joint loan.
Your credit score should be a direct result of your financial behaviour but sometimes, it might happen that your low credit score isn’t your fault. Mistakes can happen, and on rare occasion you might find that incorrect information has been recorded on your file. If you notice a sudden dip in your credit score or find it to be unusually low, it’s worth looking at a free copy of your credit report online from any of the major credit reporting agencies, and checking it thoroughly for any errors. If you find something wrong, you can dispute the listing immediately to have it removed from your file and improve your credit score.
