Ignoring Your Credit Report
One of the simplest yet most overlooked mistakes is not checking your credit report. Many young people assume their report is accurate or that they don't have one yet. However, errors are more common than you think. These can include incorrect personal
details, loans you never took out, or payments mistakenly marked as late. Such inaccuracies can unfairly lower your score. In India, you are entitled to a free credit report from each of the major bureaus (like CIBIL, Experian, etc.) annually. Make it a habit to review your report at least once a year. If you spot an error, dispute it immediately with the bureau. Correcting these mistakes can provide an instant boost to your score.
Making Late Payments or Missing Them Entirely
Payment history is the single most important factor in your credit score, making up about 35% of the calculation. For a young borrower, even one late payment on a credit card bill or a small EMI can significantly drop your score, sometimes by as much as 100 points. Lenders see late payments as a sign of financial indiscipline. This negative mark can stay on your credit report for years, making future loan approvals more difficult. To avoid this, always pay your bills on or before the due date. The easiest way is to set up automatic payments for all your EMIs and at least the minimum amount due on your credit cards.
Maxing Out Your Credit Limit
Getting your first credit card can be exciting, but using its entire limit is a red flag for lenders. This is measured by the Credit Utilisation Ratio (CUR), which is the percentage of your total credit limit that you're using. A high CUR suggests you are overly dependent on credit and might be under financial stress. Financial experts recommend keeping your CUR below 30%. For example, if your credit card limit is ₹50,000, you should aim to keep your outstanding balance below ₹15,000. If you need to make a large purchase, consider paying down the balance quickly or spreading it out to keep your utilisation low.
Applying for Too Much Credit at Once
When you're starting out, it can be tempting to apply for multiple credit cards or loans to see which one you get approved for. However, every time you apply for credit, the lender performs a 'hard inquiry' on your report. One or two inquiries are normal, but multiple applications in a short period can lower your score. It signals to lenders that you may be 'credit hungry' or in financial trouble, making you a riskier borrower. It's wiser to research your options, check your eligibility, and apply only for the credit you genuinely need. Space out your applications by at least six months whenever possible.
Closing Old Credit Accounts
It might seem logical to close a credit card account you no longer use. However, this can actually harm your score. The length of your credit history is a factor in your score calculation. Closing an old account shortens your credit history's average age. Furthermore, it reduces your total available credit, which can instantly increase your overall credit utilisation ratio. Unless the card has a very high annual fee, it's often better to keep your oldest credit accounts open, even if you only use them for a small, regular purchase to keep them active. This demonstrates a long and stable credit history to lenders.
Co-signing Loans Without Understanding the Risks
Helping a friend or family member by co-signing or acting as a guarantor for a loan is a generous act, but it's also a significant financial risk. When you co-sign, you are legally responsible for the debt if the primary borrower defaults. Any missed payments by them will be recorded on your credit report and will damage your score just as if you had missed the payment yourself. Before you agree to be a guarantor, carefully assess the primary borrower's ability and willingness to repay the loan. If you have any doubts, it's safer to decline, as their financial irresponsibility can directly derail your own financial goals.
