In the 21st century, credit has become a large part of everyone's personal finances. These days it is important to maintain good credit standings because, if not, it could lead to a few headaches. Problems people face due to bad credit include:
- Loans being denied
- Being given higher interest rates
- Increased insurance premiums
Bad credit habits can even impact your application for a coveted job you are hoping to get, as some employers are looking at credit reports too. If you want the job, you'll likely want the competitive edge of having a good credit score. What can you do? The best way to keep a solid credit rating is to keep yourself in check and avoid the bad spending habits that can drag your score down.
Charging All Your Purchases
In today's digital society, plastic is encouraged. People use it for everything from major purchases to picking up a cup of coffee at a local Starbucks. However, these charges quickly add up, and come to month's end you might find you can't pay your bill. Carrying credit cards is convenient, no doubt about it. But did you know that whipping out that card too many times can drag down your credit score?
The reason it can negatively impact you is because it's easy to accumulate high levels of debt - and it's not the good kind that makes your report look attractive. Debt accumulated from spending with plastic is considered to be a type of "bad debt".
If you find you are carrying over balances and your credit card bills are spiraling beyond your budget, it's time to make changes in your spending habits. Use cash when you can, and budget your purchases so you don't overspend on unnecessary items. If you are not keeping track of your purchases, start doing so. Credit.com recommends checking your accounts frequently, so you haven't overspent by the month's end and can afford to pay your bill. 2
If you pay off your card monthly, this will be far less of an issue. But you still have to be careful. One of the things considered in scoring is how much revolving credit a person has vs. how much he or she is using. The smaller the percentage, the better. Bankrate recommends 30 percent or lower as being "optimum". 4
The key is not to let things get out of control and keep balances low.
Carrying Too Many Cards
While the number of cards you have may not necessarily drag down your credit score, the amount of debt you carry can. Your debt-to-credit ratio directly impacts your rating. Freescore.com notes it is important to "keep this ratio at, or below, 35 percent" (or less) of your overall available credit. Freescore notes 40 percent or more will start "to do serious harm" to your score. 3
Avoid making minimum payments and keep your balances low, or better yet at zero, each month. Accumulating too much debt will not only result in high interest amounts being accrued, it will also negatively impact your credit rating. Having low balances across several cards hurts you too, so don't try spreading out debt as a strategy. Instead, focus on using one or two cards and then pay them off as soon as possible, if not immediately. Possessing some credit diversity is good, but you have to strike a good balance. Then keep it in check.
Making Frequent Late Payments
Late payments are another bad habit that can ruin your credit score. If you have a basket or pile of bills that is not organized and you find you often miss due dates, it's time to change your accounting habits. Set up a filing system, organized by due date, and make sure your payments are on time. Even better, if possible, some experts suggest paying your bill as soon as it arrives. That way you can steadily develop a good repayment history, making yourself appear more favorably as you are scored.
Applying Too Often for New Cards
Too many credit inquiries can also potentially drag down your score. These kinds of checks, referred to as "hard inquiries", are conducted by lenders (as opposed to "soft" checks which are done during background checks). One hard inquiry isn't going to hurt your score, but if you apply for many cards with several lenders checking your report, this type of increased activity looks bad - like someone who is anxious to gain credit.
Many credit card companies, and retailers, often try to entice consumers to special offers or deals that are given on credit. There are often financial incentives offered or some other carrot dangled, such no interest for six to 18 months, in hopes of enticing people to apply. Instead, find a couple of good credit cards that meet your needs, and stick to it. According to experts, the average American has about three cards. Only apply for credit when it is absolutely necessary. The longer your history is with a single lender, the better it looks. Opening and closing accounts to get the best deals typically hurts your score in the long run.
Other Ways to Potentially Drag Down Your Score
There are a few other ways people inadvertently might drag down their scores. This includes having issues of not paying other types of bills on time, including, but not limited to:
- Rent payments
- Medical and healthcare-related obligations
- Back taxes
- Unresolved utility bills
Even not paying off library fines or properly closing your gym membership can hurt your score. Always be sure anything related to payments is settled properly, this way you avoid potential problems down the road.
Bad credit can have a direct impact on your life. However, by avoiding the pitfalls that can ruin your credit, you can keep your rating in good standing. Also, if you really have trouble gaining credit, you can apply for a secured credit card.
[ Related Reading: 4 Ways Credit Cards Have Transformed Society ]