The following is a guest post by Tiffany Wagner about poor financial habits. If you’d like to contribute a guest post to Money Q&A, be sure to check out our guest posting guidelines.
Your credit score sets the boundary between getting approved or declined for a loan or credit card. It determines your creditworthiness and interest rates.
Lenders use your credit score as one of the critical deciding factors to let you borrow money to purchase a house or car, rent an apartment, or take out a school loan. The scores set by most lending platforms like Credit Ninja may range from 850 (perfect), 760 (excellent), down to 300 (disaster).
As such, it’s important to keep your credit score healthy by ditching these poor financial habits out of your system.
7 Really Poor Financial Habits
Making Late or Missed Payments
Timely and consistent payment history accounts for 35% of your entire credit score. It includes insurance premiums, loans, credit card bills, and the frequency and amount of your payments.
But, it doesn’t necessarily mean a single late payment will ruin your credit completely.
What it truly means is that if you make late or missed payments a habit, your credit score will suffer. Further, your creditors will be more than willing to jack up your interest rate and charge late fees after several occurrences. And, you’ll end up paying it in two ways:
- increased rates on credit lines and later loans
- immediate fees for missed payments
The moral lesson: Procrastination is not good for your finances. So, be sure to pay your balances without fail, and on time.
Increasing Debt-to-Credit Ratio
When you have not been extended to a new credit line but your balances spike, your credit score will drop. This manifests when that balance is on your credit card and wasn’t paid right away.
The extended credit you use makes up 30% of your credit rating. That being said, you need to pay attention to the amount of credit extended to you and keep your balances as minimal as possible.
Applying for Too Many Credit Card or Loan Requests
In calculating your credit score, credit bureaus include loan or credit card accounts you’ve previously opened and applied for.
Know that new credit accounts comprise 10% of your credit score. Thus, applying for multiple credits within a short period of time usually sends the wrong signals to credit bureaus.
For instance, if you applied for two credit cards in August, a car loan in September, followed by a consolidation loan in October, expect for your credit score to nosedive. It might be temporary, particularly if you’re just starting out in building financial stability. However, be cautious about how often you apply for new credit or loans.
Further, be attentive about different credit cards and how they will affect your credit score.
For example, regarding home equity loans, there are differences between home equity loans and home equity lines of credit. One is sure to affect your score negatively, while the other will not. It pays to inform yourself always.
Disregarding Your Financial Responsibilities
For an obvious reason, ignoring your lines of credit and loans is sure to take a toll on your credit card score. But you might ask, do unpaid medical bills and utility bills hugely influence your score?
The answer is, not quite.
The majority of these companies don’t report for regular payments. However, if you’re a proven delinquent when it comes to paying bills, your credit will hurt. The best thing to do is to create payment plans with these companies to avoid consequences.
Good faith is enough for these companies to keep your credit score sound and healthy. Also, communicating with their representatives is one of the most important and easiest ways you can do to avoid troubles with bills.
Shutting Your Credit Card With a Balance
The impression that closing your credit account is beneficial for your score is not quite true. In fact, shutting your credit card account can plummet down your credit score and affects your credit utilization negatively.
A fraction of your score is credited according to the overall credit extensions granted to you. Thus, removing a credit card out of the equation eliminates the value of credit given to you, which consequently damages your credit score.
For example, you have a total of $32,000 worth of credit. If $22,000 is used and $5,000 of it comes from the card you wanted to close, your current credit will drop from $32,000 to $27,000. It’s a good thing if you have no balance. But, if your card is already maxed out, your credit balance will remain at $22,000.
The sudden spike in your debt-to-credit ratio will bar down your score.
The key here is to be strategic in canceling or closing your cards. Don’t close them until you’ve cleared out the balances to minimize your credit utilization ratio. Closing a credit account with an unpaid balance will appear in your credit details, something that you don’t want to happen.
Further, if you’re a millennial who hasn’t establish a robust credit history yet, avoid closing your oldest card. Your credit history, along with your credit card account’s age, makes up for a certain percentage of your credit score. That said, keep your oldest card open and close or cancel a newer card with the highest interest rate or annual fee.
But of course, if you truly don’t want to rack up debts, and that a credit card is too much for you or its terms are no longer feasible for you, then closing it is probably the best move.
Leaving Your Credit Card Unused
Make no mistake as not using your credit card might shorten your credit history.
It might not automatically harm your credit score, but if it’s inactive for quite some time and the bank will decide to close your account, that’s when the problem arises. In case you don’t know, it’s worth 15% of your overall credit score.
To avoid this pitfall, use your card at least once a month then pay the balance on time. This practice will help you maintain a good credit score. It’s also an efficient way to keep your card active without the need to swipe it often.
Not Checking Your Credit Score
At this point, where do you stand with your credit score? It’s important that you stay afloat with your financial responsibilities. A healthy credit score usually ranges from 680 to 850. Make sure that your credit report has no errors or inconsistencies.
Credit reporting agencies also make mistakes. If you’re too lenient with this matter, it might cost you thousands of dollars, unless you are keen enough to spot and correct them.
When you find any inaccurate data or errors in your credit report, contact the concerned lender or bank to update and correct them. It will help improve your credit score and iron out mistakes in your credit record.
It’s all in your hands to make sure your credit score is in good standing and accurate. Failure to do so can lead to potential money problems and poor financial habits down the road and years of headaches. For this reason, do yourself a favor, pay attention to your score, and steer clear of anything that could spoil it.
What about you? Do you have poor financial habits? What are you doing to get better?
Tiffany Wagner is a seasoned writer who loves to tackle topics about finances and loans. She shares her tips and insights with her readers so they will not commit the same financial mistake as she did in the past. During her spare time, she embarks on new adventures with his friends.