In the US, credit cards are everything. You can use credit cards to pay off almost anything and everything. That’s why a bad credit score may hurt your finances. And even if you have rock-solid self-control, there are some things you do that hurt your credit score without even realizing it.
Here you’ll see the scenarios on how do you get a bad credit rating and how we can avoid it.
Understanding the credit score works.
Getting an idea on how credit score works and its definition can help you gain insight and thought on how to deal with it, you can check other websites or consult a lending institution.
By easy definition, credit is scored by points based on your payment history, debt, balances, and how long you’ve been using your credit cards. Getting higher credit scores means more chances of getting loans, less interest, and more upper limit.
On the other hand, a low credit score could hinder your access to loans, and if you do manage to get one, you’re going to pay a higher interest rate.
Spending way out of your salary.
When you have a credit card, usually banks would allow you to buy items and incorporate it as a balance, which means you can pay them on a later date.
This opportunity is commonly abused by purchasing items that are too expensive and out of your salary budget. And things not paid on time will damage your score and lower your loan opportunities.
This feature is also a challenge for people with good credit ratings. It is tempting to purchase something just because you can without checking your finances. Spend smart by using cash for your basic needs and anything within your salary budget. Use credit cards to significant and beneficial items to you.
(Not) Building safety measures.
Safety measures mean getting an emergency fund to unexpected situations. This avoids using your credit card and getting unwanted loans.
Ideally, the usage of credit cards has to be a last resort if your emergency fund does not cover up the full expense. Start saving $100 per month and watch that steadily growing up. Not only can you use that in emergencies, but this might also cover the Caribbean vacation you desperately wanted.
Lending out your credit cards.
This is a big no for all credit card users, don’t give out or lend credit cards because chances are, you may not be able to handle the balances after using it. Regardless of what happened to the spending, the responsibility is upon you. Try to understand that your credit cards are under your name, and the accountability to pay them up is also on you.
Paying the minimum on credit card balances.
Let’s say you can pay debts on time or even earlier than expected. That’s good, but what if you’re paying the bare minimum of it? This can potentially lower your score.
One consideration in making payments is your trend and history. Meaning, your score will be affected by the time you need to pay back a loan fully. Loans that take too long than the recommended time frame will bear an impact on your Credit score.
Before making loans, consult an expert and ask for the recommended time frame and amount to be paid without affecting your credit score.
Closing old credit cards.
As you go along with managing your finances and credit scores, you will eventually face a decision to close one of your Credit cards in preparation for a newer one. Think twice about making this decision, as this will also affect your standing.
Old credit cards are a testament to how you take care of your debts; they bear a significant factor when applying huge loans, such as vehicles and home loans. If you’re planning to get a new card, it’s better to keep your oldest card and possibly cut-off younger credit cards.
Not understanding credit card terms.
Your credit card agreement for every application tells you everything you need to know about using it, primarily how interest works in every purchase, underlying fees, and anything that makes your Debt go higher.
Understanding the features and reading the fine print of your credit card can help you avoid urgent debts and have more control in your finances. It is recommended to review your credit card terms before applying and possibly take a consultation from the bank also to set your expectations once you’ve been issued a credit card.
Credit cards are valuable items only if you use them right. These cards are also not meant as a key to a lavish life as all things purchased will sooner or later be collected for monthly dues.
Understand that there will be a time when your credit score goes down unexpectedly. Hence, pt’s best to always prepare with a proper mindset and proper budget to recover. And as much as possible, use cash.