Top Common Credit Mistakes and How to Avoid Them
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Your credit score, a simple three-digit number, holds significant importance in your life when it comes to finances. As it is considered an indicator of your behaviour as a borrower, you would need to take care of it and ensure that your credit score doesn’t fall off - if your credit goes south, you can face some serious repercussions when applying for new credit.
To avoid such consequences, you would first need to know about some common credit Score mistakes and how to deal with them. This will allow you to formulate a strategy that can ensure that you have a good credit score and get the best financing options in the market without any hassles.
Credit Scores in UAE - An Overview
Before moving on to the credit score mistakes to avoid, let’s understand how credit scores are classified in the UAE-
| Score Range | Category |
|---|---|
| 300-540 | Very Low |
| 541-650 | Low |
| 651-710 | Medium |
| 711-745 | High |
| 746 to 900 | Very High |
The al etihad credit bureau (AECB) is responsible for calculating and generating credit scores in the UAE. The bureau makes use of your transaction history, current and previous loans, current credit card status, existing credit enquiries, and other details to come to this score.
Let’s now move on to understanding common credit score mistakes and how to counter them.
Top Credit Score Mistakes That You Should Know About
Here are the mistakes commonly made by borrowers that hamper their credit score and their overall profile as a borrower –
1.) Late or Missed Payments
A late payment or default is one of the biggest factors affecting your credit score, if not the most significant. Since your payment history has a significant role in the calculation of your credit score, this error can certainly bring down your credit score.
Even if you make one late payment or miss it altogether, you might see a negative impact on your credit score.
Tip: The best way to counter this error, well, is to make timely payments. However, if you are missing payments due to negligence, the ideal solution is to set up an auto-payment method. With this feature, all your dues will be deducted on their pre-set date automatically.
Alternatively, if you are having difficulties in making payments or managing your debt, you can talk to your lender and restructure the debt for some relief. You can also connect with your loan provider to avail of an instalment deferment, which can provide temporary relief without affecting your credit score.
2.) Maintaining a High Credit Utilisation Ratio
When you are using a credit card or any other such credit line facility, you need to keep the credit utilisation ratio in mind. This ratio is simply the percentage of credit that you have used against the total credit limit. For instance, if you have a credit card with an AED 50,000 limit and you have used AED 25,000, your credit utilisation ratio will be 50%.
The credit utilisation ratio is another major factor contributing significantly to your credit score calculation. It is considered an indicator of how responsible you are with your credit cards and other instruments.
Tip: The first thing to do to avoid such a scenario is to lower the usage of your credit card or repay the amount without any delays. For this, you can try to clear out as much of your existing credit card debts as possible. Another option here is to increase your total credit limit, which can also bring down the credit utilisation ratio by increasing the denominator.
As per finance experts, you should try to keep your credit utilisation ratio below 30% when you are trying to improve your credit score.
3.) Submitting Multiple Credit Applications at Once
Conducting thorough research to find the ideal loan or credit card option is a smart move, as it helps you find the best deal at the best rates and terms. Applying for all your shortlisted options, however, is not advisable with respect to your credit score.
On receiving your application, banks and financial institutions raise a query with the respective credit bureau. These enquiries are categorised as hard queries and have an effect on your credit score. While the impact of such enquiries is nominal alone, multiple hard enquiries (made when you submit multiple loans or credit applications in a short interval) can significantly pull down your credit score.
Tip: The solution is pretty straightforward - avoid applying for too many loans or credit cards at a time. You should, instead, explore the top options available and compare them to find the ones that best suit your requirements and financial conditions. For this, you can continue on policybazaar.ae, head to the relevant section for credit cards or loans, and fill out the lead form to get to the quotes page.
In case your application is rejected, you should work on enhancing your financial profile and ensure a healthy gap for your next application.
4.) Closing Old Credit Cards
Another common mistake that a lot of people make is closing their old credit cards. It can certainly be an excellent move to streamline and declutter your financial activities. With respect to our main concern, however, you can actually end up disturbing your credit score in this process.
Since the length of your credit history plays a crucial role in determining creditworthiness, closing your old accounts shortens this record. This, in turn, can lower your credit score.
Tip: The best way to avoid this is to keep your old credit cards active, especially the ones with a positive payment track record. Make sure that you are using these cards at times and paying the dues to keep them active and contribute positively to your credit score and repayment record.
5.) Cosigning a Loan Without Consideration
Applying for a joint loan can be a great idea. It enables you to access more funds and at better terms. However, not being attentive here can affect your finances as well as your credit score. As a co-borrower, you are equally responsible for the obtained credit - if the other person fails to make the repayments, you can face a negative impact on your credit score. Additionally, not going through the terms of the loan in advance and agreeing to any unfavourable condition can bring difficulties as well.
Tip: The most straightforward way to avoid this credit score mistake is by taking necessary precautions while opting for a joint loan. Experts usually suggest that you should only opt for a joint loan with your immediate family members or trusted friends. In any case, make sure to check out the loan terms and understand your financial responsibility before signing any document.
6.) Not Reviewing Your Credit Report Regularly
Another common credit score mistake to avoid is failing to check your credit report regularly. Your credit report is an essential document that contains all the details of your credit. Failing to review it will keep the unnoticed mistakes ongoing, which can lead to a reduction in your credit score. Furthermore, when you check your credit report, you can identify whether there are any fraudulent transactions against your name and report them immediately to get them resolved.
Tip: Make sure to review your credit report on a regular basis.
To Conclude
The importance of credit scores is hard to overstate. When you apply for a new credit card or loan in the UAE, your credit score is pulled out. In case your score is on the lower side, you can face rejection or difficulties in getting approval at favourable terms.
Building your credit score is a long process. To ensure that your efforts in improving your credit score don’t go in vain, you would also be required to avoid the common credit score mistakes that we discussed earlier. The key is to remember that there is no magic fix — you would need to responsibly manage your debts and finances over time.
To check your credit score range for free, continue on policybazaar.ae, head to the ‘credit score’ section, and fill out the displayed form.
| Credit Score for different types of Loan | |||
|---|---|---|---|
| Credit Score for Personal Loan | Credit Score for House Loan | Credit Score for Car Loan | Credit Score for Student Loan |
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