“Oh my God, take a look at my credit score. Its awful!” cried my cousin showing his credit score along with the credit information report (CIR). “I have a salaried IT job & a healthy bank balance, have always paid the credit card balance in full and have never taken any loans. And this is what I get to show for it?”
I could understand his anger and frustration. He seemed to have everything going for him while hunting for a home until he thought it might be a good idea to check his credit score before applying for a loan. I tried to pacify him saying that his credit score would not be a deal breaker for a home loan, but he wasn’t satisfied. He wanted to understand why his credit score was messed up.
The CIR listed 4 major factors that could affect his (for that matter, anybody’s) credit score:
- Late payments or defaults in the past
- High utilization of credit limits
- Higher percentage of credit cards or personal loans (i.e., unsecured loans)
- Credit hungry behaviour
My cousin had never taken any loans in the past. As we delved deeper into the details of the CIR, a bunch of credit card mistakes slowly unraveled themselves.
The Gen Y consumers start using their first credit card in their early 20s. Many don’t realize that these innocent looking mistakes can impact their credit score. Here I list a few credit card mistakes that you should avoid and try to learn from my cousin’s mistakes (he won’t mind).
Make full payments every month on or before the due date. If your bank allows it, set up an automatic online bill payment with an upper limit OR avail the auto debit facility. If that’s not possible, at least set a reminder on your phone or desktop calendar. Paying beyond the due date attracts late fee and impacts your credit score negatively.
My distraught cousin said, “I wasn’t aware of auto debit facility and my bank doesn’t allow an automatic online bill payment for the credit card. I forgot to pay attention to the credit card statements when working long hours on a particularly challenging project running on a tight schedule. But I would still pay my dues in full whenever I remembered or found spare time during the month.” The bank charged ₹ 400 late fee for a couple of months while he worked hard to impress his boss and the clients.
Habit of making minimum-only payments
Whether its auto debit or manual payment, make sure you pay the total amount due and not minimum amount due. Making minimum-only payments during financial crunch is okay as long as you don’t continue to make purchase transactions when you still have outstanding dues from the previous month. Remember that you pay hefty interest on outstanding credit card debt.
Not reviewing the credit card statement thoroughly each month
Just because you have setup the auto debit doesn’t mean you can ignore the credit card statement. Review all transactions to ensure that they were authorized by you. Banks require that you report any disputes or fraudulent activity without delay (usually within 60 days of receipt of statement). You may still have to pay the dues on those transactions until the dispute is settled.
Not reading the terms & conditions (T&C) of the credit card
Many don’t bother to read the T&C of their credit cards fully and end up paying unnecessary fees and surcharges. The T&C usually list all fees & other charges (joining, annual, renewal and late payment fees, fuel surcharge, charges levied on exceeding credit limit, transaction fee and service charge on cash withdrawals etc.) that need careful review and acceptance. It also has information about the rewards schemes.
“A few years ago I had requested for a ‘no annual fee’ credit card from another bank. However, I came to know that the bank salesperson had misinformed me about the annual fee after receiving and using the card on a couple of transactions. Apparently the card had an annual fee that would be waived only if I request them upfront every year. Also, I usually had to wait a long time to speak to a real person on their customer support service number. I cleared all my dues and stopped using the card. I remember requesting them to close the account, but didn’t follow up. I destroyed the card and forgot all about the card,” my cousin continued. “After a year, I received a call from the bank saying ₹ 74 as annual fee this year is overdue. I told them I won’t pay because I had stopped using the card and requested them to close the card. They just wouldn’t close the account.”
“That’s because there was outstanding amount of ₹ 74,” I replied. “Now this is showing up as a default on your CIR.”
This brings us to our final credit card mistake that you should never commit: Closing out a credit card without understanding how your credit will be impacted.