The following is a guest post by Derek Fisher
The cost of living is high enough when financially sound, but consumers with damaged credit pay a premium for insurance, financing, and credit card privileges. Taking an active role preserving your credit rating is the only way to reduce the cost of borrowing and sidestep the unreasonable cost of bad credit. All too often, however, consumers sit idle until they need a loan, and then seem surprised to find their rating in disrepair. Use these proactive steps to protect and preserve a favorable credit score – or you’ll ultimately pay the price, in the form of higher rates.
Pay Timely – Without Exception
A late payment is one of the fastest ways to adversely impact your credit score. That’s right – even one late remittance can haunt you, as creditors have the right to report these inconsistencies to credit bureaus. In practice, many lenders extend courtesies to their clients, giving them the benefit of the doubt, when payment difficulties arise. In these cases, your bank or credit card company may be willing to overlook a single late payment. Press your luck, however, and a pattern of late bill payments will undoubtedly end-up on your credit record. Depending upon the severity and frequency of the insufficiencies, failing to pay timely can have lasting impacts, which will cost you money, over time.
Once you are branded a risky borrower, lenders have no choice but holding you to a different standard. As a result, some financial products become off-limits, and the high risk loans that are approved, include higher rates and tighter terms. Instead of conventional personal loans, for example, consumers considered risky may turn to alternative forms of funding, which will probably carry higher costs. If you do find yourself experiencing short-term payment difficulties, try to get out ahead of the problem, contacting each creditor impacted by the cash flow shortage. Proactive moves lead to better outcomes, and simply talking to a representative may be enough to head-off late fees and other charges.
Maintain a Reasonable Utilization Ratio
Credit reports use complex algorithms to establish credit scores. Although you may not be an accountant, or have in-depth experience understanding such calculations, it is important to recognize key credit reporting features. The ratio between available credit and the amount used each month, for example, gives credit reporting agencies valuable information about your spending habits, which may, in turn, have a negative impact on your overall score.
Although timely payments furnish a common-sense approach to protecting creditworthiness, your credit utilization ratio may require a closer look. After all, using available credit and making timely payments should result in a great score, right? Unfortunately, this isn’t always the case. If you run a high credit card balance each month, approaching your credit limit during each billing period, credit reporting agencies take-away a negative impression. Even if you pay your full balance by the required due date, the sum of charges in-play, during a given month, may be a blemish on your record. To avoid this negative consequence, limit credit-based purchases to reasonable levels, and make card payments online, well-ahead of established statement dates.
Limit Credit Applications to Funds you Really Need
Financial industries are competitive, so banks and other lenders aggressively pursue business. These for-profit enterprises naturally want you as a customer, so they actively solicit for various types of consumer credit – from cards to home equity loans. While each of these financing opportunities may speak to a real need, it may be tempting to apply for funds you don’t really need. This is a bad idea, for several reasons.
Opening credit lines you don’t need can lead to spending indiscretion, which increases the chance you’ll take-on oppressive debt. At the same time, each application has an immediate, negative bearing on your report – even if you never use the financing applied for. For starters, a credit application launches a formal credit inquiry, each of which slightly reduces your credit strength. More importantly, however, new accounts skew the average age of credit contained on your report. Since credit agencies prefer to see a long history of positive outcomes, adding too many new credit cards and loans equates to higher risk. If you need more financial resources, seek them deliberately, rather than signing up indiscriminately.
Bad credit has consequences. Though it can be repaired, over time, a negative rating will always cost you money. In order to protect your score and maintain access to the most affordable loans and credit card terms, it is essential to be proactive. For the best possible results, always pay debts on-time and manage accounts conservatively, without opening unneeded lines of financing.