Four Credit Traps You Should Know To Help Safeguard Your Credit Profile

Lenders assess loan applications based on a variety of parameters, including the credit history of borrowers. The credit history is reflected in the CIBIL score, which becomes the first lens through which almost all lenders evaluate such loans. This is all the more true for personal loans, which are mostly unsecured.

The credit score or the CIBIL score is a three-digit number that varies in the 300-900 range. The higher the score, the better is the credit history and vice versa. The score depicts the borrowing history based on existing or old loans as well as credit card usage and the repayment of their dues. This is essentially tracked for the last 36 months and if one has missed an equated monthly installment (EMI) it lowers the credit score.

Missing even one repayment can hit a borrower’s credit profile and credit score, something they should always safeguard against and not fall into credit traps of any kind.

Here are the four credit traps that you need to safeguard your credit profile from.

Easy Credit Cards

Most of us keep receiving calls and messages about “lifetime free” credit cards. It is very easy to fall into this trap. There are many people who hoard credit cards and then fail to keep track of them. Even if you don’t spend anything on these cards, they may incur some charges during their lifecycle. Not just getting cards, even inquiring about too many cards can affect the credit profile. A credit card user also needs to make sure that he or she pays the dues with interest every month.

The credit profile takes into account the credit card utilisation ratio—the amount spent versus the limit available. One should always try to keep this low. If the amount spent on credit card gets closer to the upper limit, it affects the credit profile negatively. It is very easy to fall into the trap of credit cards and this can affect the credit profile for a long time.

Too Many Loans or Loan Queries

With so many lenders chasing individuals to take loans it is easy to fall into a debt trap. Loans are available for any kind of need with little hassle. But what people miss is that all these small loans can add up to a big amount and the interest on them can eat a significant portion of their savings. Also, all these loans and repayment history will reflect on their credit profile. One should be aware of the credit traps and take loans only when needed. This also helps keep track of repayments and the interest one will be paying on all the loans.

One should also make an effort and ensure that outstanding dues, especially for unsecured form of credit such as credit cards or other personal loans, are paid off. Thanks to easy internet access these days mobile users tend to keep checking offers and many a time enquire about a loan even when they do not need it. But this could affect the CIBIL score as lenders take these enquiries as an indication that the person is seeking debt and shopping around. Too many queries with multiple lenders could also show one is anxious to take a loan.

EMI Game

It is very easy to convert any purchase or credit card dues into equated monthly installments, or EMIs. This can be done at a click of a button. Most online marketplaces offer goods on EMIs, making people buy things which they may normally not be able to afford. One can easily fall into this credit trap as EMIs bunch up and affect the credit profile.

Long-Tenure Loans

Any big loan for a long period keeps weighing on the credit profile for a long time. While a long tenure does make repayment easy by reducing the size of EMIs, it is always a good idea to keep duration of loans as short as possible and to repay chunky loans faster. This helps improve the credit profile, making way for new or urgent loans.

Conclusion

Credit traps are easy to fall into but difficult to get out of. They not only affect credit profiles but also the financial well-being of a person. One should always watch out for safeguards against credit trap and rely only on reputable lenders such as IIFL Finance for loans.

IIFL Finance follows complete transparency and offers loans without any hidden costs. One can check IIFL Finance website for various loans on offer at affordable interest rates. You can also use the EMI calculator on the IIFL Finance website to check what is the right mix for you.