Good credit rating is something that most of us adults work hard to achieve. With good credit your financial life is easier — lenders are more considerate to your requests and better interest rates for when you need to borrow money become more easily accessible. But sometimes, life happens and all of a sudden you find yourself in a rut that is a bit difficult to climb out of. As we all know, bad credit is well, bad. It impedes your ability to get a car loan, home loan, personal loan, or any other form of loan from a lot of financing institutions.
While we have an idea on what the repercussions of having bad credit are, do we really know what the causes are? Of course, some things like bankruptcy are obvious. But did you know that there are actually some finance practices you may think are good but end up actually damaging your credit standing?
The Obvious Culprits
For some things, you don’t even need to do a credit check. Curve balls from life like divorce, illness, and unemployment suddenly become the determining factor on if or how much lenders are going to help you out. You just know there’s going to be a dent in your credit score when:
You incur late payments
When you go into a crisis, the first thing that usually happens is you start to miss out on a payment or two. Before you know it, penalties are piling up and it’s becoming more and more difficult to keep your finances afloat.
You default on payments or loans
When things get too hard and you suddenly just stop making payments, you’re sure to incur a bad credit rating. Just the same, defaulting on a loan is basically a statement to financiers that lending to you is a risk.
You just got a charge off
When a creditor declares you unable or have no intention of making payments (typically at the 6th month mark), your account goes into a charge off status — very harmful to your score, a little more difficult to get back to good credit.
Third party collectors are calling
This is the point when you know that things are really bad. When your creditor sells your delinquent debt to a third-party collector thing might start to get a little crazy. There are heaps of third party collectors like the American Check Processing Inc that are notorious for using underhanded and questionable methods to make you pay. Remember that when a third party company calls you and starts to threaten you with lawsuits and acquisition of property, or starts to call your place of employment, friends, and family, you should immediately call the governing body in your area.
USA – Federal Trade Commission (FTC)
AUS – Australian Securities and Investments Commission (ASIC)
UK – Financial Conduct Authority
You filed for bankruptcy
The most harmful move to your credit standing. Make sure that this is only a last resort.
You foreclosed a property
Just like having a default, it shows lenders that you are a high risk borrower because of a history of non-payment thus the foreclosure. Whether it’s your current home or a second property for renting, having a property foreclosed due to late and missed payments all lead to a bad credit score.
You have an unpaid judgement
A judgement shows creditors that the courts had to force you to pay your debt. Big no-no in your credit standing and a big red flag for financiers.
The Ones You Never Would Have Guessed
Sometimes even the most responsible people don’t get rewarded for seemingly responsible behaviour. To make sure that you don’t make these seemingly harmless mistakes, here are a few finance decisions you shouldn’t make
Using only one credit card for everything
You’d think that having one credit card to avoid credit card debt would be a good thing, right? The truth is that even if you pay your balance in full and on time every month, the tendency of using your credit card to the max every month is a No-no. This is because of this thing we call utilization. Now utilization is the percentage or amount of available credit being used. If you have $100 available credit and in your statement you use $20, your utilization is 20%.
Studies from Experian Decision Analytics have shown that people with credit ratings below 600 have an average utilization of 77.2%. Why is this significant? This is because high utilization shows that you can’t control your spending. If you max out every single credit card you have, banks would consider you as a risk. And if you think about it, if your credit card bills are too close to your income, can you realistically afford $100 to $300 on top to pay off a loan?
Paying collection items first
Believe it or not, one practice to raise bad credit is through getting another loan. While it seems counterproductive and nearly impossible because of all the credit checking, this is actually a good tactic to show creditors that you’re starting to get back on your feet. Companies like Alpha Finance cater to the credit challenged market for people in Australia who want to start rebuilding their credit.
While that’s all well and good, the trouble with some people is that they get another loan with the full intention of paying for the original crisis that got them into poor credit standing in the first place. Let’s say you became gravely ill for a time and the medical expenses became the root cause of debt. If you miss out on your car loan or credit card payments, it’s not going to matter if your debt with the collection agency is going away, your credit score is still going to take a hit from the missed payments. Make sure that all your active accounts are current first before worrying about collections. Trust me, it’ll save you a whole lot of headache.
