Do’s and Don’ts for a Good Credit History
Last Updated : July 13, 2020, 4:17 p.m.
Credit History holds special importance in any individual’s financial life. Your credit history consists of all the information about your financial transactions like Credit Card Bill payments, Loan Details, EMI Payments, etc. Based on your credit history, leading credit bureaus give you your credit score. If we were to put it simply, credit history dictates your credit score, which is a 3-digit number (usually ranging from 300 to 900) defining your creditworthiness and repayment behavior.
So, more responsibility and discipline you show in your credit history, all of it would reflect in your credit report with a higher credit score and vice versa. Your credit score can play a huge role in determining your eligibility in getting any kind of loan or credit card. That’s why it is important to have a good credit history. There are some things that you need to keep in mind if you want to build a good credit history. In this article, we would be telling you about some of the Do’s and Don’ts with which you can have a good credit history and thus a good credit score. So, keep reading.
Do’s for a Good Credit History
First, we would tell you what are the things you must do to ensure a good credit history. Some of the important ones are paying bills on time, having a good credit utilization ratio, credit mix, etc. You can look at all of them below.
Pay Bills on Time
The first and foremost thing that you should always keep in mind that there is nothing better than paying your bills on time whether it is your Credit Card Bill or Loan EMIs. Whether it is your credit card bill or EMI of an existing loan, you need to pay the credit card bill or EMI on or before the due date. By paying your bill on or before the due date, you will have a proper repayment track that will ultimately reflect in your credit report. History of on-time payments is one of the most important factors helping you get a good credit score. So, missing just one EMI or Credit Card Bill can negatively impact your credit score.
Have an Ideal Credit Utilization Ratio
The Credit Utilization Ratio is also one of the important factors that can affect your credit score. It is nothing but the percentage of the total available limit of your credit card that is used in a month. Suppose your overall credit limit is INR 80,000. Then you should not spend more than INR 24,000 (30% of the total credit limit) in a month.
According to the lenders, it is advised to keep this ratio to 30% or less. Let us tell you why? If you keep spending more than the ideal ratio every month, lenders might see you as a greedy borrower and you may face difficulty in getting loans or credit cards in the future.
Have a Better Credit Mix
It is important to have different types of credit (secured loans, unsecured loans, credit cards) in your overall profile. This will indicate to the lender that you can handle different kinds of debts responsibly. But it doesn’t mean you should opt for unnecessary loans or credit cards. Always keep your repayment capacity in mind. Apart from having different kinds of loans, you also should pay them on time.
Check Your Credit Report Regularly
You should also check your credit report regularly to check if there are errors in the details that will be affecting your credit report negatively. There can be different mistakes in your credit report such as incorrect personal details, incorrect current loan amount, showing fully paid off the loan as currently running loan, etc. If you find any errors, you can resolve your credit score related disputes at different credit bureaus.
Don’ts for a Good Credit History
Now, know all those factors that you should not do if you want to have a good credit history. All of them are mentioned below. Do check them!
Never Pay Your Credit Card Bills Partially
A lot of credit card users have this tendency to only pay the minimum due amount of their credit card (usually 5% of the total bill amount) to save themselves from the late charges. Some, on the other hand, pay more than the minimum due but less than the total due to prevent late payment charges. But by doing this time and again, they fall into the vicious debt trap as the interest keeps charging on the remaining amount they don’t pay. This is known as the Revolving Credit and this keeps getting higher and higher for those who pay the due partially and people may also default as the overall debt can go beyond their limit.
That’s why it is advised to always pay your bill in full as it impacts your credit score positively and helps in reducing your debt. Whenever you spend with your credit card, always do it keeping your repayment capacity in mind. It is not advised to do unnecessary spending just because you have the option to pay the amount later.
Don’t Close Old Accounts
A lot of people close their oldest credit cards when they want to opt for a new credit card which can be the biggest mistake considering the credit history. By doing this, it affects both the credit utilization ratio and your average age of credit history. People having a longer credit history will always have a better chance to have a good credit score as compared to people with multiple recently acquired loan accounts or credit cards. Your old credit accounts give lenders an idea about your experience in handling different kinds of debts. Then, lenders can provide you new debt without any doubt.
Don’t Apply for New Credit Unnecessarily
You should remember that applying unnecessarily for new credit cards or loans (secured or unsecured) multiple times in a short duration can impact your credit history negatively. Lenders might see you as a credit hungry borrower and reject your application. Also, your credit history will have all your inquiries about loans and credit cards. This will reduce your credit score. So, apply for a loan or credit card only if you need funds. Also, if you already have existing loans and are applying for new loans, lenders might charge you higher interest rates that can make your repayment amount higher than usual.