Why your creditworthiness can go down with on-time payments!
What is the first thought that comes to mind when you come across the term “credit score”?
Surely it must have something to do with credit and credit card payments, right? Finally, repaying your credit EMIs and credit card statements in full and on time is given the highest weight when calculating your creditworthiness.
However, have you ever wondered that despite making loan repayments on time, your creditworthiness can still go down or down? Surprised? Read on to learn how and why your creditworthiness can plummet and / or go down, even if you are disciplined with credit and credit card repayments.
1. You are spending more than 30% of your total credit card limit
Among the various factors that affect the calculation of your credit score, your credit utilization (CUR) plays a crucial role. CUR refers to the ratio of the total credit line you have used. Since credit card issuers generally view the habit of maintaining credit utilization above 30% as a sign of credit hunger, credit bureaus will also subtract a few points from your credit rating if the 30% mark is exceeded. Therefore, if you continue to spend over 30% of your total credit limit and thus maintain a CUR above 30%, your creditworthiness will continue to be affected. If your credit card spending frequently exceeds this 30% mark, you should either ask your card issuer to increase your credit limit or opt for an additional credit card, as these steps can increase your overall credit limit and therefore lower your CUR. However, this is only possible if you do not increase your card spending when the additional limit is reached.
Also Read: Why Do Millennials Get Into The Credit Card Debt Trap?
2. Your credit report contains errors
Your credit score is calculated based on the information in your credit report. And your credit report lists the summarized version of all credit card and credit-related information that your lenders have provided to credit reporting agencies. So the presence of misinformation, errors (on the part of the lender or the bureau), or possible fraudulent activity in the credit history of your report can damage your creditworthiness. And the only way to spot such discrepancies is to check your credit report regularly and review it. This habit allows you to spot any such misinformation or errors, if any, and to report them to the lender or the relevant bureau for correction at the earliest so that your creditworthiness can be updated and improved accordingly.
3. You submit several loan inquiries to various lenders within a short period of time
Yes you’ve read correctly. Even your credit card and loan applications can damage your credit score. Every time you apply for a credit card or loan, the lender will pick up your credit report from offices to assess your creditworthiness. And any such credit report query is known as a hard query, which lowers your credit score by a few points. If you submit multiple loan applications, and all of them in a short amount of time, your creditworthiness can actually suffer a significant drop. So instead of desperately applying to multiple lenders, consider different credit cards or your financial needs instead.
Also Read: Why Credit Is Important To Millennials’ Sustainability
4. You fail to monitor co-signed or guaranteed credit accounts
Becoming a co-signer or surety for a loan is undoubtedly a noble actas you are helping someone who is having difficulty getting the loan approved. However, associated with this is also the financial responsibility to be equally liable for the timely repayment of the loan. Any form of delay or failure in repaying this jointly signed or guaranteed loan will therefore affect your creditworthiness in addition to that of the main borrower. So instead of ignoring or neglecting this account, it is wise to keep an eye on its repayments to ensure that the carelessness of others does not affect your creditworthiness. The best way to keep track of things is to check your credit report every month as the repayment of the guaranteed or co-signed loan will be reflected in your credit report as well.
5. You have a higher proportion of unsecured loans in the credit mix
Another reason for a drop in creditworthiness can be if you maintain an unhealthy credit mix. The credit mix refers to the ratio of your secured (like home loans and auto loans) to unsecured (like credit card and personal loans) debt. Those with a higher proportion of secured loans tend to be rated more favorably by credit bureaus due to the lower risk, while those with a higher proportion of unsecured loans can be viewed more cautiously by lenders and credit bureaus, which leads to a decline in creditworthiness. It is therefore advisable to maintain a balanced and healthy credit mix that includes both secured and unsecured debt in credit history to maintain good creditworthiness.
Also read: Worth Explains – How to Hit Your Monthly Budget
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