Having a good credit score is crucial for accessing financial opportunities such as premium credit cards, better loan offers, and affordable interest rates. A bad credit score, on the contrary, can lead to loan and credit card application rejections.
But what is a bad credit score? Any score between 350-550 is considered a bad credit score.
Join Shriram Finance as we delve into some bad credit practices that can lower your credit score. It also shares insights on avoiding bad credit habits.
Avoid These Pitfalls: Bad Credit Practices That Can Lower Your Credit Score
A bad credit report or score can impact your ability to secure favourable loan offers. To avoid this, let's understand the common mistakes leading to lower credit scores.
Default in Payments
Delayed or missed payments are one of the major factors that contribute to a low credit score. Not paying your bills or EMIs on time increases your chances of being labelled as an unreliable borrower.
High Credit Utilisation Ratio
Maintaining a high credit utilisation ratio can negatively impact your credit score. Using more than 30% of your available credit limit indicates a dependency on credits and raises concerns about your ability to manage finances.
Not Checking Your Credit Report
Rarely checking your credit report is another bad practice causing harm to your credit score. Your credit report reflects your financial actions related to credits, and any errors or discrepancies in the report can negatively affect the score.
It is advisable to regularly check your report for accuracy and take necessary actions to rectify any issues.
Replacing Debt
Moving debt payments or applying for new loans just to pay existing bills is also one of the factors contributing to poor credit rating. This behaviour suggests financial instability and raises red flags for lenders.
Having Multiple Credit Accounts
Opening multiple unnecessary credit accounts is another mistake that can lead to a poor credit score. Instead of building a healthy credit history, individuals who open multiple accounts without proper need tend to miss out on payments and accumulate debts.
Decoding Credit Woes: How Certain Habits Can Sabotage Your Credit Score
To illustrate the consequences of bad credit practices, consider the following example:
John, who has a credit score of 650, applies for a home loan with a reputable lender. However, due to his history of missed payments and high credit utilisation ratio, his loan application was rejected.
John's low credit score prevents him from accessing favourable loan offers and forces him to seek lenders who specifically cater to individuals with low credit scores. These lenders often charge higher interest rates, resulting in an increased financial burden.
There can be a significant impact of poor financial decisions on the credit score.
Breaking Down the Damage: The Link Between Bad Habits and Your Credit Score
Here's how a low credit score affects your creditability and limits the opportunities available at your disposal.
Limited Access to Credit
It limits your access to certain loans and makes it more difficult for you to achieve your financial goals. Reputed lenders often reject loan applications from individuals with scores below 750. Individuals are forced to seek alternative lenders who charge higher interest rates or apply for specific low-credit score loans.
Higher Interest Rates
When seeking a loan with a low credit score, even if approved, you will likely end up paying higher interest rates compared to someone with a better credit score for the same lender. Lenders view individuals with low credit scores as high-risk borrowers and price their services accordingly.
No Exclusive Benefits
Having a bad or low credit score may prevent you from enjoying premium credit card benefits and offers such as cashback rewards, introductory offers, and higher credit limits. These exclusive benefits are reserved for individuals with good credit scores who demonstrate responsible financial behaviour.
Higher Insurance Premium
Insurance companies consider credit scores when determining premiums. A bad or low credit score indicates unreliability in making timely payments, which makes insurance companies wary of extending coverage at standard rates. Individuals with poor credit scores may have to pay higher insurance premiums.
From Missteps to Misfortune: How Bad Credit Practices Influence Your Score
Bad credit practices directly impact your credit score by accumulating negative marks that lower your overall rating. For instance, delayed or missed payments can have a compounding effect on your credit score as each missed payment adds to the negative history.
Consider the example of Sarah, who misses two consecutive EMI payments for her car loan. As a result, her credit score drops from 700 to 650. If Sarah continues to miss payments, her credit score will continue to decline further, making it harder for her to access favourable loan offers in the future.
Similarly, using a large portion of your available credit indicates greater dependency on loans and raises concerns about your ability to manage debt effectively. By understanding the credit score-lowering behaviours to avoid, you can take proactive measures to improve and maintain a healthy credit rating.
Conclusion
In a nutshell, maintaining a good credit score is essential for accessing favourable loan offers, premium credit card benefits, and affordable insurance premiums. To achieve this, it is crucial to avoid common mistakes affecting creditworthiness.
You should practice responsible financial habits such as timely payment of bills and EMIs, maintaining a low credit utilisation ratio, and regularly reviewing your credit report.
At Shriram Finance, we understand the importance of maintaining a good credit score and offer low-credit-score loan solutions for individuals with low credit scores. Remember that responsible financial behaviour is the key to achieving financial stability and success.
Key Highlights
- Poor financial decisions and credit score damage are interconnected to each other.
- Bad credit practices such as delayed payments, high credit utilisation, and unnecessary credit accounts can severely damage your score.
- Poor financial habits can lead to limited loan options, higher interest rates, missed premium credit card benefits, and increased insurance premiums.
- Shriram Finance offers solutions for individuals with low credit scores, providing access to loans and credit options.
Frequently Asked Questions
1. What is a bad credit practice?
Bad credit practices lower credit scores. Negative financial habits impacting credit scores include delayed or missed payments, high credit utilisation ratio, infrequent credit report checks, moving around debt payments, and opening multiple credit accounts.
2. What are the consequences of having bad credit practices?
Bad credit habits, such as high credit utilisation, indicate financial dependence and can be detrimental to your rating. Such habits demonstrate poor financial management and negatively affect your creditworthiness.
3. How can I repair my credit score after bad credit practices?
To avoid damaging your credit score, it is essential to make timely payments on all bills and EMIs, maintain a low credit utilisation ratio (using 10-15% of the total limit), regularly check your credit report for errors or discrepancies, focus on paying off debts instead of shifting them around, and open new accounts only when necessary.
4. How does missing a payment affect my credit score?
Missing a payment lowers your credit score and can limit your loan options. Reputed lenders may reject your loan application if your score falls below 750, leaving you with loans with higher interest rates. Additionally, you may miss out on premium benefits offered by credit cards or end up paying higher insurance premiums.
5. Will closing old credit accounts negatively impact my credit score?
Yes, closing old credit accounts negatively impacts your credit score as it shortens your credit history. A short credit history doesn't impact the credit score favourably.
