If you’re trying to improve your credit score, be sure to steer clear of these credit-damaging traps.
Your credit score is used by money lenders to judge whether or not you can be trusted to stick to a credit agreement. Having a good one can open up new opportunities in your life - like financing a car or applying for a low interest mortgage.
Bad credit tells lenders that you’ve struggled financially in the past and it could stop you from getting approved for attractive rates and deals.
Falling into bad credit can happen to the best of us, but knowing what a bad credit score is and what the triggers are can help you to avoid it or climb back out.
Here are five common pitfalls to be aware of.
Not paying your bills
If you make late payments on your bills, miss payments or pay less than you need to, it could leave a black mark on your credit record. While it’s normal for problems to crop up in life and cause short delays, it’s not a good habit to fall into and will make you look less reliable to banks and money lenders.
There are several techniques that you can use to keep on top of your bills, and one is budgeting. By splitting the money you have available to different categories such as rent, food and social events for the month ahead, you’ll know how much you have left to spend in other areas after putting your bills first.
Setting up automatic payments can demonstrate that you know how to pay your bills on time without having to remember exact dates and amounts.
Not having an emergency fund
Disasters happen, and not having emergency funds available when they do can indirectly harm your credit. If you need to pay for immediate repairs for your home or car for example, you’ll probably have to borrow money to cover the cost.
Reaching for your credit card may seem like a quick fix, but maxing out your available limit could impact your credit rating as it suggests you’re living on the edge of your financial limits. This is known as credit utilisation, and lenders generally prefer to see that you’re using around 50% or less of your available balance.
The best way to avoid this risk is to start an emergency fund. Just like you set up bill payments each month, think about setting up automatic payments to go into your savings account, too. Every little helps and it quickly adds up, so don’t worry if you can’t save large amounts each month.
Never using credit
While we’ve just talked about why it’s best to avoid relying on your credit limit, that doesn’t mean you should avoid using credit entirely. Your credit score is used by money lenders to try and predict your ability to make repayments, and if you can show that you know how to pay off credit cards, you’ll be in a better position than if you steer clear.
If you don’t have one, do your research and try to find a credit card that suits you. If you only have one and don’t have any other credit accounts, applying for a new one could also work in your favour as lenders like to see that you can manage different types of credit.
Not checking your credit report
Knowing how to check your credit score is particularly useful if you do fall into bad credit. Your credit report includes a record of your credit accounts as well as personal information used to confirm your identity. So, if you have a credit application rejected and you’re not sure why, checking your report can flag up any mistakes that could be dragging your rating down.
Your report could be missing an account with a positive payment history or it could include out of date information like an old address.
Having your identity stolen
So, you’ve worked hard to build up good credit and you’ve avoided all the risks above, yet your score still falls. This could be a sign that someone has stolen your card or payment details and is running up unpaid bills on your behalf.
It’s not always easy to spot when you’ve become a victim, so make sure you keep track of your spending and your credit report so that you can spot any unusual accounts or transactions.
Most banks now offer you the option to set up automatic alerts every time a card is used. While this may seem over the top, bad credit lasts for six years so it pays to put a stop to the problem quickly before it seriously impacts your credit rating.
Knowledge is power, and understanding more about what affects your credit score can help you to avoid getting into bad credit now and in the future.
Disclaimer: All information and links are correct at the time of publishing.