Banks and lenders are dependent on something we call credit score or the measure that sums up our records of credit card use and loan payments. Your credit score can be anywhere from 300 to 900, and scoring below 750 is already considered bad credit. This number tells how worthy you are of credit – if you’re capable of paying off your loans on time, and if you’re responsible enough to use good credit card practices. The lower your score is, the higher the risks for the lender. With this in mind, here are seven things to remember to avoid bad credit.
Recurrent Failure to Pay
Starting with the most obvious, having frequent late repayments will definitely contribute to a bad credit score. Your track record makes up around thirty to thirty-five percent of your total credit score. Every time you pay late, your bank or financial institution will automatically report this to the credit bureaus, who will then reduce your credit score. The amount unpaid, frequency of late payments, and how late the payments were are factors that contribute to this deduction. Additionally, this reflects on your credit report for up to years. So if you can, do your best to pay on time and keep your credit score up. If not, you can always give your lender a call to negotiate repayment plans.
Maxed-out Utilization Rate
Using your credit card more than usual isn’t necessarily contributory to a bad credit score. However, overusing your card to the point of near-maxing out shows poor financial management. The utilization rate, or the measure that illustrates your credit card spending versus your actual credit limit (which includes all the cards you own), is also a key factor in building a good credit score. Preferably, you should not charge more than thirty to forty percent of your total credit limit to your credit cards. For instance, if you have $60,000 for one card’s credit limit, buying something for $30,000 will automatically make your utilization rate 50%. If you have two cards, though, with $30,000 as the second credit limit, your utilization rate becomes only 33%.
Too Many Credit Cards
There are two types of loans. The first one is called a secure loan, which is when one gets a loan for a house or a property. These are secure because these purchases eventually generate more income, and in turn, invest in assets. These are considered good loans, and paying them on time creates a good credit score. On the other hand, unsecure loans, or credit cards to your name, are riskier for lenders because purchases charged on these are used to get things for personal use only. Therefore, if you have too many unsecure loans, this also means poor financial management. Furthermore, higher interest charges will be placed on your cards, making it harder to achieve a better-looking credit score.
Too Many Loan Applications
A credit inquiry is made by banks or financial institutions every time you apply for a loan or a credit card. This is then recorded into your credit track record and appears every time a lender checks you out (which happens during every application). When a lender sees you applied too many times in such a short time, you can be easily labeled as a credit risk. In turn, this reduces your credit score, which makes it, of course, more difficult to apply yet again for another loan or credit card.
Lack of updates from lenders
More often than not, lenders sometimes do not report recent repayments to the credit bureau, for some reason, failing to update your account. Your closed accounts may still be up and running from their perspective, or your paid dues may still be outstanding balances. So though this one isn’t on you, it’s still best to check with your lender at least once a year to avoid getting a bad credit score due to obsolete data.
Choosing a settlement over finishing repayments
Some people get attracted to one-time settlements with their lender when they cannot pay their dues in full at times. Keep in mind, however, that although you save a lot from this arrangement, your lender still reports your balance as “settled,” which negatively affects your credit score. When this happens, you still get labeled as a credit risk because this will turn into bad credit. A settlement means that you were not able to repay your past debts.
Nonpayment in co-signee or guarantor accounts
In accounts when you are stated as a co-signee, guarantor, or joint owner, you become just as accountable as the primary applicant. This way, any nonpayment or default done by the primary applicant will also reflect on your own credit report, and in turn, affect your credit score as well. An option to reversing or avoiding this is making the payments yourself.
Based on materials from Paisa Bazaar
CafeCredit.com/Flickr
CafeCredit.com/Flickr
CafeCredit.com/Flickr