An individual’s credit rating is calculated based on his long-term financial decisions. It contains information gathered over several years and shows lenders how a potential borrower will behave once he receives access to financing.
Generally speaking, most individuals build up their credit ratings passively, without knowing. They do so by taking out loans, returning the money, using their credit and debit cards, and even paying bills. However, there are certain things that may be damaging to their credit score that people do without realising. As a result, they go about their lives until they need a loan and apply for one only to discover that the lender denies their request.
This having been said, today we will look at the 3 most damaging financial habits that have the potential to destroy an individual’s credit rating.
- Owning to Many Credit Cards and Using Them Too Often
Many individuals use their credit cards on a regular basis, for small purchases. While this is only moderately damaging, the issue amplifies during the holidays, when everyone pays for expensive gifts or creature comforts using the cards. This creates two issues. The first one is using the credit cards too often, especially in you would have the money needed to pay for what you buy. However, there is also the fact that most people to pay their credit card debt before the month ends.
Using a credit card too often may max it out, leaving an individual unable to pay for other expenses until he has paid it off. This affects an algorithm called the “credit utilisation ratio”, which looks at how much an individual has used out of the total credit that is available to him.
Generally speaking, having a credit utilisation ratio of over 30% will lower your credit rating and affect your chances of getting a loan. The same goes when talking about using a credit card too often.
How a borrower uses his credit cards, in relation to his income and expenses gives lenders information about how he manages his finances. Overusing your credit cards, especially before applying for a loan will lower your credit rating.
- Lagging behind When Paying Your Utility Bills
This is a result of a somewhat new development, in the sense that utility companies have only recently started reporting their activity to credit reporting agencies. Nonetheless, how you pay your bills will now affect your credit rating. Those who lag behind with the payment of their bills will see their credit rating drop. The severity of this issue is determined by how often it happens.
Individuals who are regularly missing or delaying payments will suffer a more considerable long-term credit rating drop, while those who only do so once every couple of months may only see an almost negligible, short-term decrease.
- Sending a Large Number of Loan Applications in a Short Amount of Time
When they need a loan, some individuals tend to send several loan applications to as many lenders as possible just to get a response and see if they are eligible or not, and if they are, what are the terms and conditions. While this may seem like a good way to gather the data needed to make an informed decision, each one of those applications is marked in their personal financial records.
Lenders tend to interpret this habit as prospecting and conclude that an individual has an ulterior motive for which he is looking for specific terms and conditions. If you need to take out a loan, it is recommended to use the calculators (these can provide all information that one might need, from the size of the payments to the interest rate) that are offered through the lenders websites, instead of sending applications.