Credit scores are one of the most important aspects of a person’s credit report.
good credit
They represent your credit history, which affects whether you’re approved for a loan or given a higher interest rate on an existing loan.
A high credit score can help you qualify for benefits like free travel or insurance, lower your loan’s interest rate, and make it easy to get approved for a home or vehicle loan.
Keeping your credit history and score in excellent standing will always work in your favor.
But how do you do that?
Many consumers understand the importance of good credit, but not all are aware of the factors that lead to bad credit.
What leads to bad credit?
This article will discuss the factors that lead to bad credit and must be avoided, as well as the steps to take for better credit.
Late Payments.
It may not be the first time you heard of this. Even a single late payment can indeed affect your total credit score.
Timeliness of payment makes up about 15% of your FICO score, so keep an eye out for it.
Here are a few tips to help you avoid late payments:
- Set up alerts and reminders to pay your bills. Set up a reminder system with your creditors if you have a habit of forgetting about bills until they are due.
- Add due dates to your personal calendar. You can stay on track each month by keeping a list of all of your bills’ due dates. You’ll have a visual prompt every time you look at your calendar.
- You’ll have a visual prompt every time you look at your calendar.
- If you feel like you’re not going to make your due date, call your creditor immediately and explain your situation. Inform your creditor that you will be submitting your payments a few days late and ask for it not to be reported as a late payment. If you give advance notice, most creditors will be willing to extend up to 30 days and not consider it a late payment.
- Enroll in automatic payments. This option will automatically pay off your debt each month, so you don’t have to worry about it.
Excessive Credit.
How much of your available credit you use can make or break your credit score. Ideally, you should not use up more than 30% to 40% of your allotted credit.
If you have a low-interest credit card, be careful that you’re not overusing this one card for all your charges.
To avoid exceeding your credit limit, make it a habit to pay off your credit card balances in full each month.
Charge Offs.
Charge-offs are debts that you end up not paying because your creditors have given up on collecting them.
These are very negative marks that can significantly lower your credit score.
To prevent charge-offs, make sure that you respond to your creditors immediately whenever they try to contact you. Never hide or run away from your creditors.
Defaulting on a loan.
Loan default can have significant consequences on your credit score.
If you default on a loan, the creditor may report the default to credit reporting agencies.
It can harm your credit score and make it more difficult to obtain future loans.
Too many inquiries.
Each time you apply for credit, the lender will make an inquiry in your credit report.
All inquiries done will be reflected in your credit report. Why are too many credit inquiries bad for your credit?
To begin with, applying for too many accounts at once creates a negative impression on lenders.
Even more so each time your application gets declined by a lender. Such rejections send out the alarm to a prospective lender that you may be a high-risk borrower. Therefore, be careful about sending credit card applications if you’re not serious about the card.
Some people apply for credit cards solely to receive the free shirt for signing up. You may believe that you are losing nothing, but such a habit can seriously harm your credit score.
Unauthorized charges.
Finally, no matter how careful you are as a borrower, you may become a victim of fraudulent transactions at one time or another.
You may not even know that you have a past due debt with one of your credit cards because you didn’t even make those purchases in the first place.
How do you prevent such cases?
- Keep track of your credit card transactions. Monitor your spending and look for any unauthorized charges.
- Check your credit card statements regularly and your credit report at least twice a year.
- Use a credit monitoring service to keep track of your credit score and immediately report any changes in unauthorized activity to credit bureaus. It will help to keep your credit score from falling too low, which could result in higher interest rates on loans.
Bad credit can be a stumbling block to obtaining approval for a loan, lease, or other types of financial transaction. Fortunately, there are numerous ways to improve your credit score. If you believe your credit is in bad shape, it is essential that you take action and begin working to repair the damage.
