Never did you think that three little numbers would affect such a big part of your life. That’s right – your credit score.
Your credit score is reflected off your credit report which contains your financial history, debts, timeliness, and responsibility.
Today, your credit score matters now more than ever, especially when you apply for an auto or mortgage loan. Lenders will analyze your credit score, so they can safely assume your credit risk, which is the likelihood you will pay back the agreed amount.
Not only does it determine your eligibility, it also is used to determine what rates and the dollar amount you are qualified for.
As you can see, maintaining a high and strong credit score is extremely important for many reasons. Which is why you need to know what things to avoid on your credit to protect yourself.
Never miss a payment
Missing a payment negatively impacts your credit score. Even if you miss the due date by a day, your credit score will be affected.
The longer you wait to pay your bills, the more damaged your credit score will be.
Which is why you should never miss a payment. Missing payments or not making payments at all will jeopardize your credit score, which will make getting approved for a loan or line of credit fairly difficult.
In other cases, if you delay paying a bill for over 90 days, your debt could be sent to collections, which will be highlighted on your credit report.
If you apply for a loan, your lender will look at your credit score. They will extensively review your credit report and look for any suspicious activity that could suggest inconsistency or late payments. If they find any red flags, they have every right to deny you.
Luckily, there are ways to make payments on time without lifting a finger. Many companies offer borrowers the option to enroll in auto pay. This handy feature automatically deducts the agreed amount from your banking account to pay for your monthly bill. Therefore, you will always pay in full and never miss a payment.
The bottom line: never miss a payment, that way you will never have to worry about your credit score affecting your lending eligibility.
Avoid maxing out your credit cards
Your credit report also contains your credit card history, which factors in payments, debts and withdrawals.
All credit cards have a credit utilization rate, which is a percentage of available credit that you are using at a specific moment.
Creditors suggest that people should use 30% or less of their available credit to be at a comfortable utilization rate. This healthy balance will show that you are using the right amount of credit to prove your financial stability, while not being too dependent on it.
To avoid maxing out your credit cards, find out what your limit is on each card. Next, calculate 30% of each card’s total limits.
For example, if one card has a limit of $1,500 and another with a limit of $2,000, your total limits would be $3,500. 30 percent of your combined limits would come out to be $1,050.
Therefore, to manage and keep a safe credit utilization rate, you should never charge more than $1,050 total on all your cards.
Skip out on cash advances
Cash advances are a nice, quick and easy way for people to get cash. Many people use their credit cards to withdraw money from an ATM to have cash on hand.
Because it is so convenient, people overlook its expense. If you want to withdraw money using your credit card, you will have to be comfortable with a few factors.
First, ATMs usually charge a service and processing fee for cash advances. Interest rates could also be higher than your credit card’s purchase interest by at least 1 to 7 percentage points.
Meaning, this quick and easy transaction could be costlier than you think. Not to mention, cash advances could jeopardize your credit score, depending on how much you take out.
If your credit balance is outstanding or too high, pulling out a cash advance could negatively affect your credit utilization rate, which will also affect your credit score.
Skipping out on cash advances can benefit you in the long run. Before you put your credit card in the ATM, calculate your credit card’s interest cash advance rate to see if it is higher than your purchase interest rate, along with any fees that may apply. This way, you can see if taking out a cash advance will help your situation.
Don’t open new accounts
People who have debt think one of the best and easiest solutions is to open a new account with a 0% interest rate and transfer the balance.
This way, they have extra time to pay off that debt without adding extra interest. However, while that may be true, adding another account would be considered a “hard inquiry” on your credit report.
Hard inquiries show up on your credit report when you apply for credit. For someone who does not have debt, the impact would be small. On the other hand, if you have debt and are opening a new line of credit, this will negatively affect your credit score.
Not only will your score be affected, but most balance transfers charge a fee of usually 3% to 5% of the transferred amount. To top it all off, if you fail to pay off the transferred balance during the initial period, many credit cards require you to pay interest on the entire transferred amount.
Depending on how much debt you have, transferring your balance could help solve your issue. Majority of the time, experts will advise you to not open a new account. Instead, come up with a strategic plan to get rid of your debt and stay out of debt.
Don’t separate your mortgage and auto loan applications
As mentioned before, applying for too many lines of credit within a short period of time can negatively affect your credit score. Each time you apply for a new line of credit, it will show up as a hard inquiry on your credit report.
However, this is the opposite when applying for a mortgage and auto loan. Creditors understand people need to compare and shop around for the best loans and interest rates. Which is why if you apply for both a mortgage and auto loan within a short time period, this will show up as one hard inquiry, opposed to two.
A short time period varies from lender to lender, but if you stay within a 30-day window, you should be fine.
To make this process easier, use a service that compares multiple rates on several loans at once. This way, you can quickly get results and find which lender can offer you the best rate.
Before you start applying for mortgage and loan applications, be absolutely sure you can handle both payments. Mortgage and auto loan payments can be quite expensive, which is why you need to have a steady income in order to finance the two. If you can’t keep up with payments, this will harm your credit score.
If you are struggling to choose one over the other, weigh out the pros and cons of owning a house and car. This will help you decide which loan you are ready to take on.
Also, keep in mind, there are credit repair companies that can work on your credit.