5 Credit Card Mistakes 99% of People Make

5 Credit Card Mistakes That Lower Credit Score

Getting a new credit card not only gives you an opportunity to spend more but also rewards you with benefits. However, many credit card owners make mistakes that affect their credit scores and lead to paying hefty interest amounts.

A lot of people usually misunderstand automated reporting, and because of this, people end up lowering their credit scores unnecessarily.

Here are the 5 credit card mistakes that can adversely impact your credit score and how to avoid them.

1. Spending More Than Your Credit Limit

Having a good credit limit is one thing, but spending above your credit limit is another. Credit bureaus rank the percentage of money you owe on your credit cards in relation to your credit limit.

For example, if your credit limit is Rs. One Lakh, and you spend Rs. 60,000, your utilization rate will be 60 percent. Credit bureaus consider this to be a bad utilization rate as it shows that you are dependent on credit.

In order to maintain a good credit score, try and maintain a low utilization rate (preferably under 30%).

This will help show credit bureaus that you’re not a credit user and will boost your credit score with your utilization rate.

2. Paying Only the Minimum Amount Due

You probably see a “minimum amount due” on your credit card statement. This amount is usually easy to pay, and you might consider only paying this amount so that you can keep using your card.

However, doing so can leave you trapped in a cycle of rotating debt as you will start paying hefty interest amounts on the amount that you spent.

Once the amount due is less than the total amount spent, the rest of the money that you owe will begin accumulating interest from the day of the purchase.

You will end up paying a lot of money in interest, and the amount that you originally owed will keep you in debt.

The best way to avoid this is to pay the entire amount stated in your billing statement by the due date. In case you are not able to do so, pay as much as you can so that the amount that you owe can reduce.

3. Overlooking the 15 Days Rule

When you miss a credit card payment, you might think that you have a month to pay the amount so that it doesn't affect your credit score.

However, this is not the case.

Under the Reserve Bank of India guidelines, banks and financial institutions are required to report credit card details to credit bureaus every 15 days.

Because of this, any delay on your part will affect your credit score right away.

In order not to affect your credit score, it is essential that you make payments on time.

4. Agreeing to Settle a Debt

If you are unable to pay back an amount that you owe to the bank, the bank can ask you to settle the debt.

When you settle a debt, you pay back an amount that is lower than the amount that you originally owed, and the bank closes the account.

It is important to keep in mind, however, that settling a debt leaves a negative mark on your credit report.

Having a settled account on your credit report indicates to lenders that you aren't reliable, and it can become difficult for you to take a loan in the future.

Moreover, your credit score can also drop drastically (between 75 and 100 points) after you settle a debt.

5. Applying for Multiple Loans at the Same Time

Many people who need money apply for multiple loans from different banks at the same time to see which bank approves their loan.

However, this can affect your credit score in more ways than one.

As soon as you apply for a loan, the bank takes a snapshot of your credit report, and the entire process is automated.

When you apply for multiple loans, all the banks that you applied to take a snapshot of your credit history, and the fact that you applied for multiple loans in a short period of time reaches the automated banking systems.

Because of this, all your loan applications can be rejected.

Maintaining Good Credit Score

Credit card usage is made easy for purchasing all kinds of things, from daily food necessities to other huge amounts. Borrowed money makes life easy for us; however, maintaining discipline with respect to debts is quite important.

In order to keep your good credit score and save yourself from unnecessary interest payments and other penalties, there are some simple techniques that one can use:

• Never cross your limit of 30 percent of your credit limit.
• Always try to pay off your statement balance completely and on time every month.
• Ignore debt settlement proposals because such proposals damage your credit score.
• Do not apply for a new loan or credit card frequently.

Regular payment records help in building a stronger credit history. This can help you qualify for future mortgages, car loans and other credit, with better interest rates, which makes things like buying a home or a car much more affordable.