Five reasons your credit score can drop despite timely loan and credit card repayments

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Credit bureaus take into consideration multiple factors while computing your credit score. Although your credit repayment history is widely believed to receive the maximum weightage, it’s no less crucial to pay attention to other vital factors and financial moves which can impact your credit score.  

Here are five  reasons why your credit score may remain low despite timely and regular repayment of your credit card bills and loan EMIs-

 Maintaining credit utilisation ratio above 30%

Credit Utilization Ratio (CUR) is the ratio of credit limit utilised by you against the total credit limit available on your card(s). As lenders generally consider credit utilisation ratio of over 30% as a sign of credit hunger, credit bureaus reduce your score upon breaching this level. If you frequently tend to breach this mark, consider either requesting your card issuer to increase your credit limit or opt for an additional credit card.

Errors in credit report 

Your credit report captures credit information provided by lenders, basis which credit bureaus compute your credit score. Hence, any error or misinformation by your lender or credit bureau can damage your credit score. These can even be a sign of fraudulent activity. It therefore, it is advisable to fetch your credit score agt least once in three months. This can help in timely identification of any discrepancies  and reporting the same to the credit bureau for rectification. 

Also, as a consumer you can fetch at least one free credit report from each of the four credit bureaus per year. Alternatively, you can fetch free credit report as well as free monthly updates from online financial marketplaces.

Submitting multiple credit queries to lenders

Whenever you apply for a loan or credit card, the lender assesses your creditworthiness by fetching your credit report from the credit bureaus. Such enquiries are termed as hard enquiries, each of which pulls down your credit score by some points. Hence, multiple enquiries within a short span of time can affect your credit score. 

So, instead of submitting multiple credit enquiries directly to lenders, visit online financial marketplaces to choose the right credit option and most suitable lender on the basis of your credit score, income and other eligible criterion. 

Failure to monitor co-signed or guaranteed loan account(s)

When you co-sign or become guarantor to a loan, you are equally liable to ensure its timely repayments. Any delay in repayment impacts your credit score as well. This makes it crucial to regularly review the repayment activities of your co-signed or guaranteed loan accounts to ensure timely payments. 

Having higher share of unsecured loans in credit mix

Credit mix is the ratio of your unsecured and secured debt. Credit bureaus tend to score consumers with higher share of secured loans more favourably. Thus, those with a higher share of unsecured loans such as personal loan, loan against credit card, etc should always try to create a healthy credit mix by either considering prepayment of their unsecured loans first, or by replacing them with secured loans. 

The writer is Chief Product Officer, Paisabazaar.com. Views are personal