I paid my loan EMIs on time, paid off my credit card dues timely, and never defaulted on any payments. I felt proud of myself, because despite not being good with numbers, I was getting by alright. I was happily living under this illusion of being a responsible adult who was in charge of their finances, and had an excellent credit score. Until one day.
This was the day that I discovered my credit score was not excellent anymore, not even good, but only ‘fair’. How did my credit score get ruined, and to such an extent? What went wrong? When I set out to find the answers, I was quite amazed at what I came across. There were three things that hit my credit score and these, I am going to share with you…
My credit card limits were maxed out
I had 3 credit cards whose maximum limits I had utilized, for almost a year now. In fact, I had gone over-the-limit for one of the cards a few times. While I had made my bill payments in full most of the times, I had also, some times, left a part of the balance unpaid. This hurt my credit score as my credit utilization rate became very high. Using the entire credit limit on my cards indicated that I wasn’t able to pay my bills on time and was unable to handle credit. Thus, making me a riskier bet for the lenders.
What I should have done instead was, of course, not max out my limits. But also, make early payments throughout my billing cycle, so that I could maintain a low utilization rate despite using a lot of credit. Financial experts say that one must strive to keep the credit balances below 25% to 30% of their available limit to achieve the best results. A lesson, I learnt too late.
I frequently increased credit card limits
Every time my credit card issuers offered me a chance to increase the credit limits on my cards, I didn’t think twice before accepting the offer. Since there was this extra capacity to spend money and the option to pay later, the temptation was irresistible. How did this affect my credit score? Two words that were no less than a death spiral – debt trap.
I was constantly carrying a balance on all of my credit cards and at times, only paying the minimum due. I was clearly not in a position to pay off existing debts and should have thought long and hard before accepting the credit limit increase.
Even though the increase in credit limit had offered me the flexibility of availing more debt, it had also impacted my credit score as I had not used it prudently. Frequently increasing my credit card limits was a sign of being dependent on credit to manage my expenses, which eventually raised a red flag for lenders, and affected my credit score.
Transferred the balance quite a few times
A balance transfer works well for people who can manage the process responsibly. I was definitely not one of them because not only did I play the entire transfer game wrong, I was stuck in a situation where I was simply transferring balances from one card to another every few months.
I opened new credit card accounts, transferred the debts and continued to take on new credit card debt each month. Since I used up the credit limit freed from the other cards, my credit utilization shot up. This mindless debt build up and credit utilization cycle hurt my credit score.
In addition to this, two other factors lowered my credit score. First, the hard inquiries made by lenders to open new credit card accounts. And second, the old credit card I had closed after transferring the balance, shortened my credit history, as I lost some of the credit history built up over the years.
These were the three things that ruined my credit score and might be ruining yours too. Initially, it might not seem so, but mounting credit card debt makes it difficult to keep up with payments eventually. Always remember that, when it comes to taking debt, don’t bite off more than you can chew.