Credit permits organizations to acquire machines/ inventory they need to create the things we purchase. A business that couldn’t take loans, may not be able to purchase product material, tools, or pay the workers it needs to make items and make money later.
For us as customers, it’s reasonable to pay over the long run, instead of buying at once. Credit makes it feasible for customers to buy autos, homes, and exclusive items.
Your credit score decides how much risk is involved in lending you the money. Equifax, Experian, and TransUnion are the credit reporting agencies. Your credit behaviour is reported to these agencies by your creditors whenever you borrow.
Lenders check the credit reports and credit scores to decide upon your loan application. Ruining your credit score is such a duck soup if you are inattentive as a credit cardholder.
Why Your Credit Score Is So Important
In addition to the lenders, insurance companies, employers, and utility businesses keep an eye on credit reports/ scores.
Credit card owners – purchasers, business ventures, consumers – who make effort to maintain these scores have easier access to
- lower interest rates,
- favorable terms and conditions
- insurance premiums
Good credit score holders are preferred for lending student loans, mortgage, and credit requests. They are seen as creditworthy candidates carefully managing their financial/ credit decisions
High interest rates for services/ loans and unfavourable terms are the drawbacks of poor credit score as higher risk is involved.
Factors Affecting Your Credit Score
A good or bad credit score isn’t out of luck – or bad luck for that instance!
Your credit score rating is a non-sudden consequence of your behaviour to these 5 factors which immensely impact the rating.
Payment History
- Bankruptcies, lawsuits
- Timely credit repayments
- Amount, duration of late payments
Credit Utilization
- Amount of credit borrowed
- Balance vs. credit ratio
Credit Inquiries
- Whether – or not – you apply for multiple credits over a small time span
- What is the amount of these credit requests?
Length of Credit History
- Age of your credit card account usage
- Age of your credit card account
Credit Mix
Credit cards, retail accounts, consumer finance company accounts, and business installment loans; revolving and installment credit accounts, etc. are various kinds of credit account.
The weightage of these factors is varied, as specified in the pie chart above! It can help you prioritize your efforts in improving your credit rating.
Things That Are Ruining Your Credit Score
1. Not a Credit Card Owner
Credit history is built through various means and credit card possession is one of them.
Loan accounts and credit card accounts of 6 months age, which report to credit reporting agencies, qualify you for the credit report/ scoring.
2. Net-to-Net Usage of Available Credit Limit
Commonly known as credit utilization ratio is the amount of credit you use in percentage, as compared to the credit limit available to you.
If your credit limit is $7000, using up to $6995 isn’t a good idea as per financial experts.
Financial experts advise that your credit usage shouldn’t rise 30%. Lenders see it as an ideal ratio for responsible and “comparatively” low-risk borrowers.
3. Skipping Due Bills
Ignoring bills pile up with additional fees. Lenders might absorb these late payments but due bills hurt your credit score badly.
If any such delay occurs for more than 90 days, it’s not only reported on your credit file but stays there for at least 7 years!
| Pros of Paying Bills with a Credit Card | Cons of Paying Bills with a Credit Card |
| Quick Payments – Pay within seconds with your phone applications. – Pay on time without the hassle of checks and office visits. | Credit Utilization If you have a tiny credit limit, paying all the bills with the card may enable you to cross the available credit limit. – This in turn decreases your credit score. |
| Automated Payments – Credit cardholders can automate their accounts to pay bills on specific dates each month. – No late payments. | Already in Debt – If you are already in debt, then paying bills with the card is not a responsible action. – It negatively impacts your credit file. |
| Build Credit – When you are consistent with monthly payments, paying in full, and paying on time – it helps you to build your credit score. | Bill Payment Fees – Before automating your payments on a card, whether secured or unsecured, check upon any fees linked with bill payments. |
In Canada, you may make bill payments with secured and unsecured credit cards. Paying bills with a secured credit card in Canada can build your credit history and eventually your credit score.
Ensure clearing bills in full amount and within the allowed time span!
However, if you aren’t able to pay bills timely, the secured credit card accounts have user deposits – the issuer may deduct bills from those deposits and adversely affect your credit report.
Unsecured credit cards, however, don’t have such user deposits – they are the uncollateralized versions of credit accounts.
4. Credit Card Payments Overlooked
As discussed above, the payment history accounts for 35% of your credit score. This means the making payments on time is the significance of all the 5 factors affecting your credit history.
- Can’t afford payments
- Forgot to pay balances
- Otherwise missed payments
Whatever is the ground behind missed payments, your credit score is indeed going down if you overlook the payment obligations.
Other Disadvantages of Skipping Payments
- Higher Interest Rate
From the month you made payments late, the financial institutions can raise your interest rates.
- Lower Credit Limit
In case you skipped payments and are out of reach, credit card issuing companies can lower your credit limit.
- Late Fee Charges
In addition to the interest and late payment, you may also be responsible to pay late fees. This fee is usually stated in the credit card agreement – whether you are a secured or unsecured credit card user!
5. Stopped Using Your Credit Card
In case you stop swiping your card to make purchases, the creditor lowers your credit limit – you are no longer in the credit score race.
Inconvenient experience with credit is one of the most common reasons for ceased the use of cards.
But financial experts advise continuing small purchases with credit cards and paying balances on time each month.
A credit history, good history, in particular, is extremely crucial for a student loan, home, and auto loan request in the future!
6. You are an Authorized User of a Bad Credit Card Account
If you are an authorized user of a weak debt managing credit card account, the primary cardholder isn’t the only one bearing its adverse impacts.
Poor debt management of that account is reported to your credit reporting agency and eventually reducing your credit score. If you are an authorized user of a good/ responsible account, it would positively impact your credit score.
Because you are inheriting the payments activity consequences as an authorized user, it’s wise to authorize for only the accounts of financially responsible individuals.
7. Careless of Your Personal Information
Sensitive personal info typically covers:
- Your credit card numbers
- Your SSN Social Security Number
- Your Bank Account
To protect yourself from identity theft, not disclosing the above-stated personal info is a sensible approach.
This way you are saved from:
- Someone accessing your account without permission
- Someone opening an account using your name and credentials.
8. Co-Signing for a Negligent Credit Card User
When you co-sign for an account, you share its responsibility. If the card owner defaults on a loan or makes lousy payments – this situation appears in your credit report. You are legally liable to pay any balances of this account.
So whenever co-signing for an account, ensure it is owned by a responsible and careful person.
Vice versa, if the cardholder is a rational person, his financially responsible acts – like paying on time – there is a possibility of growth in your credit score.
Cosigning vs. Authorized User for a Credit Card
An authorized user is allowed to use your credit card by law. Unlike a cosigner, he is not accountable if the real owner misses his/ her payments.
If you have a weak credit history, a credit card cosigner – with a fine history of repayments and a good credit score – can help you with credit card approval.
Pros and Cons of Cosigning
| Pros of Cosigning | Cons of Cosigning |
| Improvement in Credit Scores (of you and the joint account holder) Responsible financial decisions would positively impact you and the credit history of the co-signer. | Future Borrowing Capacity When you’ve already taken debt in this joint account – new financing would be difficult to obtain even with good credit scores. |
| Better Financial Management If you share the financial responsibilities with a spouse or business partner, a joint account like this can ease the management. | Riskier Credit Scores As already discussed, good management can help the credit scores of both cardholders and the co-signer. Bad management can hurt scores of both. |
| Qualify for a Credit Card A co-signer with good credit history enables a bad credit score bearer to get card approval, lower interest rates, and favourable loan terms. | Relationships The co-signer is equally accountable for debt (if any), if spouse, children, or any other relation mismanages the account. |
Why would you want a Good Credit Score?
Credit Scores affect your chances of home loans, student loans, auto loans, mortgage, favourable insurance rates, and negotiation powers (while deciding terms and conditions).
In some cases, it also influences your chances of getting jobs. In such jobs, employers and organizations desire, from the applicants/ candidates, clearance from the personal credit checks!
Avoid Ruining Your Credit Score
Now that we’ve looked into the significance of maintaining a good credit score, the following are some practical ways to avoid damaging your credit report.
Paying Account Balances
Delaying balances on credit accounts wound your credit score even if the bills are cleared on time.
A responsible cardholder keeps the credit utilization rate and debts under control. To manage your balances well, try keeping these balances low.
Build Your Credit File
Card issuers and lending agencies report to the credit reporting bureaus. Opening a credit card account builds your credit file.
For starting a credit score track record, possession of a credit account in your name is a kick starter.
Limiting Credit Applications
The weightage of credit inquiries is about 10% of your credit score. So, taking benefits from short-term discount offers if you make credit purchases isn’t a good idea!
Higher credit inquiries are proportional to higher risks, of lending you, in the eyes of creditors.
Don’t Pay Late
Whenever you make late payments, it signals your unreliability as a borrower because lenders and creditors are highly interested in, whether or not you would be able to repay the borrowed money.
Therefore, try clearing bills punctually and before the due dates.
Balance Cash and Credit Card Payments
Maintaining a balance between cash and credit is a sign of fine financial management. Owning a credit card but not making use out of it can adversely affect your credit score.
Using credit under controlled limits (advised is 30%) and cash for the rest of expenses is a mindful choice!
