Why Your Credit Score Can Fall Despite Timely Payments!

What is the first thought that comes to your mind when you come across the term 'credit score?'

Certainly it must be something related to loan and credit card payments, right? After all, making timely and full repayments of your loan EMIs and credit card bills is considered to be given the highest weightage when your credit score is calculated.

However, have you ever wondered that your credit score can still fall or be on the lower side despite timely credit repayments? Surprised? Read on to know how and why your credit score can take a hit and/or be on the lower side even if you are disciplined with your loan and credit card repayments.

1. You spend beyond 30% of your total credit card limit

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Amongst the various factors affecting the calculation of your credit score, your credit utilization ratio (CUR) plays a pivotal role. CUR refers to the ratio of the total credit limit utilized by you. As credit card issuers generally consider the habit of maintaining a credit utilization ratio of over 30% as a sign of credit hunger, credit bureaus too go ahead with pulling down your credit score by some points upon breaching this 30% mark. Hence, your credit score will keep getting harmed if you keep spending beyond 30% of your total credit limit, and thus maintaining a CUR of above 30% as well. So, if your credit card spends tend to frequently exceed this 30% mark, consider either requesting your card issuer to raise your credit limit or opt for an additional credit card, as these steps can increase your total credit limit, thereby pulling down your CUR. Although this is possible only if you do not end up spiking your card spends upon obtaining the additional limit.

Also Read: Why Do Millennials Fall Into Credit Card Debt Trap?

2. Your credit report contains errors

Your credit score is computed on the basis of the information mentioned in your credit report. And your credit report lists the summarized version of all the credit card and loans related information provided by your lenders to the credit bureaus. So, the presence of any misinformation, error (on the part of the lender or bureau) or possible fraudulent activity in your report's credit history can harm your credit score. And the only way to spot such discrepancies is by periodically fetching your credit report and reviewing it. This habit will allow you to detect such misinformation or errors, if any, and quickly report them to the lender or the concerned bureau for rectification at the earliest so that your credit score can be accordingly updated and improved.

3. You submit multiple credit queries to various lenders within a short span

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Yes, you read that right. Even your credit card and loan applications can harm your credit score. Each and every time you apply for a credit card or loan, the lender fetches your credit report from bureaus to assess your creditworthiness. And each such lender initiated credit report request is termed as hard enquiry, which pulls down your credit score by some points. Consequently, if you submit multiple credit applications, and that too in a short span of time, your credit score can indeed suffer a significant dip. So, instead of desperately applying with multiple lenders, you should instead compare various credit cards and/or loan options of as many lenders as possible and then submit the application only to the one you zero in on, whose product features and eligibility criterion match with your financial requirements.

Also Read: Why Credit Score Is Important For Millennials To Be Future Ready

4. You fail to monitor co-signed or guaranteed loan accounts

Becoming a co-signer or guarantor to someone¡¯s loan is undoubtedly a noble act, as you lend that helping hand to someone facing difficulty in getting the loan approved. However, with this action comes the financial responsibility to be equally liable to ensure the loan¡¯s timely repayment. Any form of delay or default in that co-signed or guaranteed loan¡¯s repayment will hence, impact your credit score as well, besides that of the primary borrower. So, instead of ignoring or failing to pay attention to that account, it¡¯s prudent to keep a track of its repayments, to ensure that someone else¡¯s carelessness does not impact your credit score. The best way to keep track is to review your credit report every month, as the guaranteed or co-signed loan¡¯s repayment will reflect in your credit report as well.

5. You have a higher share of unsecured loans in the credit mix

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Another reason for a fall in credit score can be the maintenance of an unhealthy credit mix. Credit mix refers to the ratio of your secured (like home loans and car loans) and unsecured (like credit card and personal loans) debt. Those with a higher share of secured loans tend to be scored more favourably by credit bureaus due to the presence of lesser risk, whereas on the flip side, those with a higher share of unsecured loans may be viewed more cautiously by lenders and bureaus, hence resulting in a drop in credit score. It¡¯s therefore advisable to maintain a balanced and healthy credit mix involving both secured and unsecured debt in credit history, in order to maintain a good credit score.

Also Read: Worth Explains - How To Stick To Your Monthly Budget

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