A good credit score can make life a lot easier. Ranging from the low 300’s to 900, a credit score allows lenders to see how responsible you have been in the past when it comes to managing your debt and paying your bills on time. The higher your score, the easier it is to obtain new credit when needed.
While a score under 600 probably isn’t going to prevent you from getting you that new car – or a house – you will pay much more for it due to higher interest rates. A score over 750 is going to open your borrowing options significantly. With the average American credit score coming in at 695 (considered fair), there are a lot of people out there struggling to bring their scores into a range that allows them to obtain the financial help they need easily.
Eventually, everyone needs to make a big purchase, and let’s face it; those larger purchases often require a loan of some sort. Failing to anticipate these big-ticket expenses can cause real havoc when it comes to your credit. If you owe too much money compared to the amount you qualify for (which is calculated by something called a credit utilization ratio), getting that new loan can become difficult. Even if you don’t have enough “extra” cash to save for future expenses, planning for that new loan can help you get what you need when the time comes.
High-Interest Credit Cards
While high-interest credit cards themselves won’t hurt your credit score unless you make late payments, the more you spend on interest, the less money you will have available to pay down the balance. Considering that the amount of debt being carried accounts for 30% of your credit score, paying down those credits cards as fast as possible can have a significant impact on boosting those scores.
Too Many Credit Cards
Having too many credit cards – especially if they all have a balance – can dramatically reduce your credit score. This is due to several factors:
Your credit utilization ratio which compares your current balances with your overall credit limits
Your ability to juggle payments
Your credit diversity – with new credit reporting practices instituted in 2017, credit scores are now bolstered by having a more diverse debt portfolio that includes both revolving and fixed debt (credit cards, mortgages, car loans, etc.).
Life Changes without Habit Changes
Getting married? Buying a house? Having a child? These are all big and expensive life changes. The problem is, many people fail to make the habit changes necessary to maintain good credit when life takes a new turn. For instance, when Jane and Jeremy had their first child, Jane decided to leave her full-time job for a part-time one. This dramatically decreased their household income at the exact time that their expenses increased. To make matters worse, Jeremy’s health insurance plan had a bigger deductible than Jane’s did, adding even more expenses to their household. Despite these income changes, the couple refused to change their spending habits. Relying on credit cards and a home equity line of credit to survive, they soon found themselves in financial trouble. Had they altered their spending habits earlier, this couple may have saved themselves a lot of grief – and avoided the bankruptcy that ensued.
The fact is “life happens.” Sometimes these inevitable events are expensive. Maybe someone gets sick and medical bills begin to mount. Or a car accident leaves a family without a vehicle. It is these types of unexpected events that can send even the most responsible person into a financial tailspin. Nothing hurts a credit score faster than sudden bills that begin to pile up – especially when you have no way to pay them off. One way to avoid the credit hit that unplanned events can have on your financial security is to:
Create an emergency fund (even $1,000 can usually handle most sudden emergencies)
Designate one credit card solely for emergencies. This gives you some wiggle room when it comes to paying for unexpected expenses.
Have a plan. Whether it is selling something, getting a part-time job, or borrowing the needed funds from an outside source, having some sort of plan for handling emergencies can keep you from making quick decisions that could have a negative impact on your financial future.
We all know the importance of a good credit score. The problem is, few people understand how those scores are calculated and what things have the most impact. Understanding that the amount of debt you carry, the kind of debt you carry, and your payment history are the most significant contributors to your credit score can help you plan accordingly – and handle emergencies more responsibly.
No one is perfect when it comes to handling their money. But, when it comes to firming up your finances, it is vital that you review the credit killers above and avoid them as much as possible.
To learn more about how to get yourself out of a bad debt situation, call the experts at Machi & Associates P.C. for a free consultation.