10 Ways you’re ruining your credit score
From failing to keep up with your loan repayments and taking on much debt to failing to check your credit report or ignoring inaccuracies, these are the 10 ways that you’re ruining your credit score.
Why a good credit score is important?
Anyone that has taken out a loan before will tell you that it’s something that comes with an upside and a downside. And usually, the downside would be brought on by our own doing.
So let’s have a closer look at exactly how you’re damaging your credit score and hopefully learn what not to do so you can turn things around and enjoy the benefits of a good credit score.
#1) Missing repayments on loans & bills
As with any legal and binding agreement, breaking it has consequences and many of those consequences are quite serious and will have a long-lasting effects. Let’s have a look at the consequences of missing repayments and therefore dishonouring your agreements:
- Late fees: the first thing that happens is that you will be charged a late fee. That is a fee that is added onto the already owed amount and failure to pay this will be seen as equal to not paying your existing loan balance. So it’s best to always just pay what you owe when it’s due by keeping up with debt repayments.
- Repossession of your asset: This is something that you will want to avoid at all costs. When a lender loses faith in you and cannot get back what is owed to them, this would be the next step to recover what you owe them.
- Credit scores: One missed payment won’t make your credit score drop drastically, however, if it becomes a regular occurrence, then your rating can drop significantly.
- Debt collectors: Debt collectors are not called upon because of one late payment, but if a lender finds that the payments are not being paid as they should on a regular basis, then they might use the assistance of debt collectors and this is not only a nuisance but unless otherwise agreed upon, all costs incurred by a lender in recovering monies owed will be yours to pay.
- Court and lawsuits: This would be a last resort, but if you fail to answer any calls or emails or messages from the debt collectors, then your lender will have no other option but to file a lawsuit.
#2) Maxing out your credit limit
Online sources agree that a credit utilization ratio of about 50% will affect your credit score. Spending between 10% to 30% of the available credit limit may be less likely to hurt a borrower’s credit rating.
It’s never a good idea to max out your credit, as it makes it harder for you to make any new transactions and you may be charged a fee. Some providers don’t charge you a fee, but they will decline any new transactions you’ve made.
It may not be a bad thing as it prevents you from making unnecessary purchases, but it can also have bitter consequences, such as an inability to service direct debits, for example, gym membership fees or any other debit order which will also carry a fee if dishonoured.
Other providers don’t charge a fee, which is an over-the-limit fee, which can go as high as $40 each time. These are for credit cards that were issued before 2012.
Any cards issued after that do not have over-the-limit fees, due to the new laws that were passed. Your provider must contact you via SMS, or email to let you know when you are close to your credit limit or when you are over your credit limit.
#3) Applying for balance transfers too often
Multiple balance transfers in an attempt to consolidate debt could both positively or negatively affect your credit rating.
Here are the factors that are at play that needs considering:
- Card availability - With a pile of debt that credit issuers know about, some companies may not even consider giving you a card with a low intro rate. It may also just depend on their policies, your credit history and score. If your goal is to achieve 0 percent cards, what will you do when the issuers start saying “no!”.
- Teaser rate and promotional period - You won’t know what your introductory rate is or how long that deal will last until you have that balance transfer card in your hand. That’s what will happen every time you apply for a card, even if you were “pre-approved.”
- Your credit line - Until you’ve applied and been pre-approved you won’t know what the size of your credit line is.
#4) Closing credit cards that have a good repayment history
Closing credit cards that you’ve maintained a good repayment history on will lower your credit score. Your credit score will also be lowered if you are new to credit or have too many credit cards.
We all know that with a low credit score, it is difficult to qualify for an apartment, another credit card or even personal loans. A lot of thought should be put into whether or not a credit card should be closed or cancelled.
There are always two sides to this coin. Having a good account helps your credit score. If you close it, you may run the risk of no longer having a report that looks reputable to lenders.
#5) Applying for several credit cards or loans at once
Applying for several credits or making many loan applications in a short space of time with different lenders may make you come across as a little desperate for credit and it can impact your credit rating negatively.
However, when applying for instalment loans such as home, auto and student loans and many of them over a short space of time, it is usually counted as one, as creditors know that you need to shop around for the best rates and terms.
Credit cards are a whole new ball game, too many enquiries over a short period can result in a significant drop in your score. In such instances making use of loan comparison sites is a better option and will safeguard your credit score.
#6) Incurring a judgement
It’s not unusual for creditors to sue a person for not paying their debt. It, unfortunately, says a lot about your payment history or lack thereof. That the court had to be involved comes up as a big black mark against your name.
There are different ways for a creditor to collect their debt from you, the debtor, but if every avenue was exhausted and you still failed to make any form of payment then getting the law involved is sometimes the only other option. Help is always available so that it doesn’t get to this point, you can contact Financial Counselling Australia, it is a free number (1800 007 007) open Monday to Friday from 9:30 am to 4:30 pm.
#7) Ignoring errors on your credit report
Another negative thing to have happened to you whether by mistake or on purpose, is having an error on your credit report. However, if it’s not fixed, it could ruin your credit score. It’s always wise to always check your score online if you can, as there are bills that do not get processed immediately and may not reflect on your credit score. To avoid all of that, you should always make sure to check your score which you can do for free once a year.
#8) Not alerting creditors when you change your name
Letting all financial institutions know that you have either gotten married or divorced or have decided to use your second name as your first name is a must. It is crucial in avoiding any errors occurring on your credit report.
If you get divorced and you have a joint credit card and your spouse is no longer sticking to the payment arrangements, your credit score could still be negatively impacted. So at all times remember to always update your information and always check your credit score.
#9) Borrowing money to boost your credit score
Scam credit schemes-sound impossible right? More often than not they are based outside of Australia. So how this works is, they will grab your attention by enticing you with a perfect offer and it will influence your credit rating, this is commonly known as “piggybacking”.
The scheme is super expensive to join and you must give all your personal information. It would profit you a lot more to use that money to pay off any existing debt, rather than to finance a quick fix to anything.
#10) Not regularly checking your credit report
It is vitally important for you to check your credit report regularly. As in point 7, to avoid any mistakes or errors on your credit score. Identity theft and fraud are things that unfortunately do happen and to secure your information, you have to keep on checking and updating your credit report.
This is even more important if you are preparing to purchase your first home or get a large personal loan as the rates you’ll be offered depend on your credit score.
It’s good to know where you stand and your credit score is a very important part of your overall financial health. Whether it’s good or bad, it’s best to know what your score is than to not know anything at all.
Checking it often also helps to make sure that all your information is accurate and that no one else has gotten hold of your personal information. Monitoring your credit puts you in control of your finances and makes you more accountable for keeping your credit score at its best.