How to Avoid a Bad Credit Score
When it comes to credit, every individual begins life with a blank slate. From that point, each credit decision a person makes impacts their credit score in a positive or negative way. By maintaining a strong credit score, individuals are able to qualify for favorable interest rates on a variety of loans. Additional benefits range from lower finance charges on credit card balances to better odds at securing loans for large purchases, such as a home or car.
When it comes to avoiding a bad credit score, there are several steps a person can take. First, it is important to pay all monthly bills on time. Payment history is the single most important factor for a credit score. Any payment that is not made within 30 days of its due date can be considered a missed payment, with a single missed payment lowering a person’s credit score by several points. Of course, multiple missed payments not only contribute to a lower score, but can also lead to more severe consequences such as foreclosure on a home or repossession of property, which will in turn further harm a person’s credit score.
For those who find themselves in a particularly precarious financial situation and simply cannot pay all of their monthly bills, it can be helpful to understand which bills are reported directly to the credit bureaus. Credit cards, loans, and mortgages are examples of must-pay bills that are always reported. Bills not directly reported to the bureaus should still be paid as quickly as possible, as recurring missed payments will eventually damage a credit score; however, they can be prioritized behind more pressing payments. With this in mind, it can be helpful to outline a hierarchy of monthly payments and strategies for catching up on missed payments.
Debt is a key area of focus when it comes to avoiding a bad credit score. Debt is the second most influential factor on a person’s credit score, both in terms of total debt and a person’s credit card balance in comparison to their credit limit, otherwise known as credit utilization. Similarly, a credit score is influenced by a person’s existing loan balance compared to the original loan amount. Credit and loan balances should be kept as low as possible.
Individuals cannot overlook the importance of basic money management skills. Unwise spending habits make it difficult to keep up with monthly payments. As individuals continue to spend money they do not have on things they do not need, their debt and credit balances will rise as their credit scores fall and reserve funds are depleted.
To avoid this pitfall, any new monthly expenses should be carefully considered. For example, a person with a strong credit score and a history of making monthly payments may feel confident about purchasing a new car. However, a new car necessitates a variety of new expenses, from monthly payments to fuel and repair costs, so individuals and families should perform proper due diligence ahead of such a purchase to ensure that the associated expenses are not too much to handle.
Lastly, individuals should work on developing a healthy nest egg, also termed a rainy day fund. While having a strong credit score can help with loans and similar applications, having a line of capital to address those missed monthly payments, new expenses, and unexpected costs can help prevent sudden debt and related concerns.
