Mistakes that can impact your credit score

5 MinsSep 20, 2022

After graduating from a top management institute, Hitesh Desai, 26, got a job with a large Indian company at an excellent salary six months ago. He has since been flooded by offers of various products from different banks – credit cards, personal loans and loans for new cars and homes.

Mistakes that can impact your credit score

Initially, Hitesh ignored all of these, but now that he has decided to buy a new car, he set up a meeting with his Axis Bank Relationship Manager (RM). A conservative person by nature, Hitesh, who had never taken any debt, wanted to better understand the process of applying for a loan and what mistakes to avoid.

The RM explained the concept of a credit score by which banks judge a person’s risk profile and why maintaining a good score is essential. She then explained the common mistakes to avoid while applying for any loan product.

1. Applying for too many accounts:
Since Hitesh is being bombarded with offers, he may be tempted to avail them and apply for too many forms of loans simultaneously. This would be a mistake. Too many applications for loans in a short period would lead the banks to conclude that he is desperate. This would be a black mark against his credit score.

2. Not reading the fine print:
People often don’t study the details and get trapped by introductory offers. This is a mistake. Every financial decision should be thoroughly researched and understood. For example, some banks may offer a credit card without any annual fees in the first year, only to charge hefty fees in the second year. Similarly, there could be offers with low interest on loans in the first year, only for it to balloon second year onwards. Hitesh should read all the fine prints and only then take a decision.

3. Standing as a guarantor:
Given his steady job and excellent income, Hitesh could be asked to be a guarantor for a loan that one of his friends or family members may be taking. Ideally, this should be avoided because in such a situation, if the original borrower defaults on a loan, then Hitesh could become liable for it. And if Hitesh is a guarantor, he should be aware of the consequences.

[Also ReadWhat is credit score? What does it say about you?]

4. Not staying within your budget:
This is a common mistake across all loan products – be it buying that fancy new smartphone on your credit card, a snazzy car, or a home in an upmarket area. While it is lovely to aspire for and work towards the good things in life, staying focussed on your budget is essential. This is especially critical if Hitesh borrows to buy these fine things. Otherwise, he may be unable to meet his debt obligations.

5. Not shopping around for alternatives:
People often go to multiple shops before buying something simple, like a piece of apparel. However, they don’t seem to do this due diligence while taking financial decisions. Given the competition in the financial markets, there is a plethora of products available. Hitesh should research various alternatives, understand the features and costs before deciding.

6. Mistakes to avoid about specific loan products:
Apart from these common mistakes, there are some that Hitesh should avoid about specific products.
For example, he should always pay his credit card bill in full before the due date. He should also avoid paying only the minimum balance, as this could land him in a debt trap. Similarly, while applying for a home loan, Hitesh should be ready with his contribution for buying the house. Typically, banks fund between 70-90% of the cost of the house and the rest has to be contributed by the buyer. Not having this amount ready would make Hitesh scramble to raise the required amount.

Finally, while taking a personal, car or home loan, Hitesh should pay attention to the tenure, interest rate and EMIs (Equated Monthly Instalments). A shorter term would mean a lower interest outgo but a higher EMI, while a longer tenure would mean smaller EMIs but higher interest expense. Hitesh should study this and figure out the best combination for him.

Axis Bank has a range of loan products from credit cards, Personal Loans, car loans, and home loans that are tailored to meet the varied requirements of its customers. Know more online.

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