Your credit score is one of many important indicators of your financial health, so it’s critical to keep an eye on it, develop good habits, and avoid making credit mistakes that can come back to haunt you.
Many people are unaware of the credit scoring system or their credit score until they attempt a major purchase that requires the use of a loan, like purchasing a home.
Your credit score and history have an impact on your life in both big and small ways.
For example, it determines what loans or credit you’re offered and at what interest rates, as well as whether or not you can rent.
If you’re married, each of you will have an individual score, but if you want to co-sign on a loan, both of your scores will be checked.
We are all guilty of this especially if you have used a credit card at some point because the pain of paying is very low when we use credit cards compared to cash or debit cards.
Impulse spending, or buying something we didn’t intend to buy, can quickly add up, especially small purchases, that is why it is dangerous.
To address this, you must
Identifying and understanding your triggers gives context and helps you identify patterns
How to Create a Budget in Six Easy Steps, How to Budget as a Couple
Your payment history has the greatest influence on your credit score. Late payments not only have a negative impact on your credit score, but they also result in late fees.
Late payments on loans and credit cards are reported only if they are 30 days or more late and can remain on your credit report for up to seven years from the date of the missed payment.
Setting up automatic payments or setting a reminder is a great way to avoid paying late.
Making only the minimum payments on your credit cards may not have an immediate impact, but it will undoubtedly increase your credit utilisation in the long run.
The credit utilisation ratio is the percentage of credit that you are using at any given time.
That means, if you have £3,000 available credit and you use £2,000 before paying it off, you have a credit utilisation ratio of 67 percent.
The ideal credit utilisation ratio is 30%, so if you have a credit limit of £3,000, you should always pay off your card after spending £1,000 on it.
So, how will making minimal payments affect you in the long run
Paying the minimum equates to incurring interest on the balance, which accumulates over time and raises your credit utilisation.
I tried this in 2021 and maxed out my card for a few months, and as expected, I saw a drop in my score by over 50points.
When you apply for credit, the lender conducts a hard inquiry to check your credit file. This assists them in deciding whether to approve or reject your application.
For credits, such as a mortgage or a car loan, having multiple inquiries in a short time usually won’t do much harm because they’re all counted as one inquiry when calculating your credit score.
But typically with credit card hard inquiries, each inquiry counts against you, and if you have multiple inquiries in a short period of time, you come across as a riskier borrower, which affects your score.
To get around this make use of soft inquiries provided by many credit card companies and comparison sites.
Using comparison sites, in particular, gives you a wider range of options
You’ve paid off your credit card, so why not close the account?
It’s generally not a good idea to close a credit card, especially your oldest one, unless the costs, such as fees, outweigh the benefits.
This credit mistake is the easiest to correct
Your credit score is calculated using information from your credit report therefore it’s a good idea to review that information at least once a year.
You will be able to identify potential problems and errors in the data they contain.
It’s difficult to say “no” to a loved one who is looking for a cosigner for any form of credit.
However, the truth is that cosigning is frequently a recipe for disaster and therefore a credit mistake.
When you cosign you risk
Typically, information about you is kept on file for six years. Some information may be kept for a longer period of time.
If you believe any of the information on your credit file is incorrect, you can contact the credit reference agencies and request it is corrected.
Yes, but the lender may require a guarantor or charge you a higher interest rate.
If you can’t literally keep your head above water. There are experts that can help with a free personalised solution
Organizations like Citizen’s advice, Step change, National debtline, Christians Against Poverty.
