Bad credit doesn’t mean you are a bad person. In fact, it is very common for responsible people to have bad credit. Whether you have let your bills get the better of you, forgotten a repayment or some other reason, life can sometimes get the better of us and lead us down the path of bad credit.
In general, the credit score rewards responsible behaviour. The idea is that if you pay off your bills and loans on time, you are rewarded with a good credit score. However, there are many reasons you can find yourself with a bad credit score. See if you are making one of these common mistakes that is affecting your credit score.
Here are common 5 reasons people have bad credit:
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Late payments
Whether it’s intentional and you can’t afford to pay off your latest credit card or make your latest loan repayments, or accidental and you completely overlook it, late payments are a common reason for bad credit. Next time that bill comes in the mail, don’t throw it onto the bench with the junk mail to be forgotten about over time.
Get it paid off and on time. And if you are struggling to meet your payments, reach out for help before your debt gets the better of you. We all have unexpected bills crop up in our life – they can’t be helped.
Even worse is not paying at all. This will lead to having your account charged off, and sent to collections. Creditors often use third-party debt collectors to collect your payment. Having a collection status on your credit file shows the creditor was forced to hire someone else to collect funds from you. As you can imagine, this doesn’t bode well for future loans. While it may seem like your only option at the time, speaking out and trying to sort your debts will reflect much better on your credit account.
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Applying for Multiple Loans
Many people don’t know this, but if you make too many credit enquiries in a short space of time it will cause your credit score to drop. While it is a great idea to shop around for the best interest rate and terms and conditions for your loan, you need to do so wisely. If you can condense all your applications into the space of a month, they will count as just the one hard inquiry and not damage your credit score too much.
Don’t give up shopping around for the best deal for you and your circumstances, instead do it in a short period of time so that it doesn’t affect your credit score in the process.
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High Card Balances
A high credit card balance seems likes the dream, right? More money to spend as you wish, as long as you can pay it back in time. While this is true, having high credit card balances (or even low ones for that matter) can decrease your credit score, depending on how much you use them. Your credit card utilisation ratio is what affects your credit score. This is the amount of credit you use in comparison to your credit card limit. For example, if you have a $10,000 limit on your card and are using $9,500 of it, you are utilising a high amount of credit and this will be reflected on your credit score.
The good news? Once you’ve paid it off, it won’t continue to affect your score.
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No Credit History
Something you may not consider – no credit history at all can also affect your credit score. Think about it, if you have no past of borrowing money and paying it off in time, you are considered a risk to financial institutions. It will be harder for lenders to asses if they should actually give you money in the future, even if you know you can pay it off in time.
Once again, this one is an easy fix, simply take out a credit card or another line of credit to help build up that score of yours. And naturally, make sure you keep up with the repayments!
Another thing to note is the more credit diversity you have, the better your credit score. Having a mix of credit types can help increase this score.
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Co-signing Credit Applications
Whether you are helping out a family member with their debt or performing an altruistic act for a close friend, when you co-sign with your good credit, you actually take on responsibility for that person’s debt. This means if they can’t or don’t pay back the loan, it will be your responsibility to do so and this will then be reflected on your credit score.
This doesn’t mean you shouldn’t help a friend or family member out, just think before you do. Make sure you can count on this person and realise how their actions can affect you.
If you work hard to avoid these common reasons for bad credit, you will find taking out a loan is that much easier.
