5 Bad Credit Habits to Avoid and How to Fix Them

In the bustling bazaars of Mughal India, circa 1600 AD, merchants relied on a system of “hundis”—handwritten bills of exchange—to facilitate commerce across vast distances. However, one misstep or an untrustworthy bill could earn you a bad reputation in the system. Fast forward to the present day, while formal banking systems have replaced the bazaars, the fight for a good credit score remains. Just like those merchants of days gone by, we also risk being trapped by bad credit habits, inadvertently undermining our financial stability.

These behaviors, similar to sneaky pests, have the potential to erode our credit score, making it difficult to obtain loans, discuss interest rates, and reach our financial objectives. Do not fret: this blog will help you identify and eliminate 5 bad credit habits.

1. The Risks of Late Payments

In the rush of everyday life, forgetting to pay a bill can seem like a small mistake. However, that apparently small late payment can have a long-lasting impact on your credit rating. Every delayed payment has the potential to stay on your credit report for as long as seven years, serving as a constant indication of previous lateness and potentially escalating into a more significant issue.

The next time you’re tempted to skip a payment, keep in mind that according to Reserve Bank of India regulations, this could result in the loss of your interest-free credit period. Therefore, it could be wise to set payment reminders or automatic payments, rank your expenses, and commit to paying on time as your financial motto.

ALSO READ: How to Avoid Credit Card Late Payment Charges?

2. Overspending Beyond Your Means

Overspending is a common poor credit habit. Swiping your credit card without considering the long-term effects is a common mistake. Before you realise it, you’re facing a huge pile of debt that you don’t know how to repay. This behavior not only impacts your financial well-being but also contributes unnecessary anxiety to your daily life.

To stop this routine, begin by establishing a budget that matches your earnings. Monitor your expenses to comprehend how and where your funds are being used. Utilise this information to reduce unnecessary costs. One Credit Card offers you the option of getting a visual analysis of all your spending—category-wise or even merchant-wise—to help you monitor expenses and avoid overspending.

3. Ignoring Your Credit Report

Neglecting your credit report is another bad credit habit that can lead to severe repercussions. Mistakes or fraudulent actions on your credit report can harm your credit score, which reflects your financial well-being. Regrettably, a lot of individuals fail to review their credit reports frequently, leading to missed opportunities to recognize and rectify these problems.

To eliminate it, be sure to review your credit report annually. Each year, you can receive a complimentary copy from all the main credit bureaus. Examine the report closely for any errors or unknown items. Keeping up with your credit report helps you preserve a good credit score and detect possible fraud sooner.

ALSO READ: What is Credit Card Billing Cycle & How Does It Works?

4. Maxing Out Your Credit Cards

Exceeding the credit limit on your cards is another instance of bad credit habits. High credit utilisation, which compares your credit card balances to your credit card limits, can impact your credit score and increase the likelihood of getting trapped in debt. Ideally, you should try to maintain a credit utilisation rate of under 30%.

To stop such poor credit habits, refrain from using your credit cards for unnecessary purchases. Furthermore, you might want to consider asking for a higher credit limit. Having a higher credit limit can boost your credit utilisation ratio, but do not see it as a reason to overspend.

5. Applying for Too Much Credit at Once

Applying for too many credit card applications within a short time frame can harm your credit score. Although these investigations usually diminish after two years, a surge of submissions can indicate financial distress to creditors, decreasing your credit rating. Avoid being lured by the temptation of immediate satisfaction and spontaneous actions. Carefully examine different credit card choices before submitting an application.

ALSO READ: Reasons Why Credit Card Application Rejected

Above all, remember, building good credit is a marathon, not a sprint. By avoiding these bad credit habits, you will be well on your way to financial empowerment. Therefore, equip yourself with knowledge, prioritise responsible financial practices, and watch your credit score soar. A healthy credit score can unlock doors to lower interest rates, better loan options, and the freedom to pursue your financial goals with confidence.

FAQs

1. What are the risks of making late credit payments?

Late payments can harm your credit score and may remain on your credit report for up to seven years.

2. How can I avoid overspending on my credit card?

Set a budget, monitor expenses, and limit unnecessary purchases. Tracking tools can help manage and reduce overspending.

3. Why is it important to check my credit report regularly?

Regular checks help you spot errors or fraud early, protecting your credit score and overall financial health.

4. What is an ideal credit utilization ratio for good credit?

Aim for a utilization rate below 30% to maintain a healthy credit score and avoid excessive debt.

5. Does applying for multiple credit cards affect my credit score?

Yes, applying frequently can lower your score, as it may signal financial distress to creditors.