Credit rating is a hugely important figure that can affect many aspects of our lives. A credit rating is a figure that is used to show to banks and financial institutes how reliable you are in terms of making financial repayments etc. A credit score may be used to judge your reliability to pay back a mortgage for example, or personal finance on a vehicle.
If you have a poor credit rating, you will struggle to take out a loan, open credit cards, or even apply for a mortgage. Furthermore, a low credit rating can also have long-lasting ramifications on your life – in most cases, it will point towards the fact that you have either a poor cash flow or are making flawed financial choices. This article looks at the main ways in which you can negatively impact your credit rating, and what you can do to improve it and your money management.
Avoid These Things At All Cost
The following is a list of 7 things you should strive to avoid at all costs if you wish to maintain a good credit rating and avoid a visit from the process server. This list is not exhaustive, but these pointers cover the main pitfalls people often face when attempting to raise their credit score and escape from debt:
1. Make persistent late payments
This is one of the areas that many people fall short – bill payments. Most financial agreements such as mortgages, car finance and rent will have set payment dates. If you regularly pay later than this set date then your credit rating will be reduced. Regular late payments show to a creditor that you struggle to manage money effectively and may even lack organizational skills.
2. Failing to pay bills
The next level from regularly paying bills late is failing to pay bills at all – this is much more critical and an issue that will damage your credit rating hugely. Even if you have a valid reason for failing to pay a bill, this will still get listed as a failed payment and damage your credit rating. If you feel you cannot make a payment, it is advisable to contact the financial provider immediately and see if anything can be done.
3. Declaring bankruptcy
Declaring bankruptcy is effectively stating that you are incapable of paying your outstanding debts. As you can guess, this will damage your credit rating immensely – why would a creditor or financial institute provide funds to someone who has legally declared they cannot repay debts? Bankruptcy should be avoided at all costs and only ever used as a last resort – you must take charge of your finances way before bankruptcy is even thought of.
4. Having multiple maxed-out credit cards
Failing to maintain one credit card can be damaging enough as it can point towards your inability to pay off debts, but having multiple maxed-out credit cards can be disastrous. In practical terms, this means you are laden with an ever-increasing amount of debt and interest that you may struggle to pay off. In terms of credit, this will destroy your score and creditors will see that you often live beyond your means.
5. Having a high level of debt
This is a given and quite obvious, but let’s actually break this reason down. Having a high level of debt can mean several different things. Firstly it could mean having a credit card maxed out, or having a single loan that has high monthly payments. This is not ideal if you struggle to keep up with payments. What’s worse, however, is when you have a high level of debt in several different areas i.e. you have a maxed credit card, car finance, a mortgage, and a maxed out store card for example. If you have a high level of debt, and something goes wrong with your source of income, you suddenly become a liability to creditors.
6. Applying for multiple loans in short sequence
This is a strange one but it can make a difference to your credit score so be wary. In short, every time you apply for a loan or finance it is noted on your credit score and is available for creditors to see. The negative aspect of this is that if you are continually refused finance and loans, there must be a reason behind it – creditors will look at your many applications and have reservations.
7. Defaulting on a Loan
There are many different types of loan – secured loans, personal loans, home loans and car loans for example. You can default on any type of loan. This effectively means you have stopped making loan repayments. This is like failing to make repayments but it can have severe ramifications and even mean that collection agencies and bailiffs become involved.
How can you maintain a solid credit score and avoid debt?
Now that you understand how your credit score can be negatively affected it is important to understand how you can avoid these situations and manage your finances effectively. First and foremost, it is important to try and live within your means at all times – as the saying goes, if you can’t afford something, then don’t. There is generally a good reason why you can’t afford something – maybe your wages aren’t high enough, or maybe what you are buying is simply too expensive. Ignoring this fact and purchasing something through finance even though you do not have the means to pay it will only lead to trouble.
Consider the implications of taking out finance
Before taking any type of finance, you should look at the full picture – is your job stable? Do you have a safety net if your source of income changes? Do you have any health issues that could affect your repayments? Do you actually need this finance? Can you actually afford to pay for this loan and still live comfortably? How long is the payment term? What is the interest rate? Do your research, make a list and consider every eventuality before taking out a loan or personal finance – if you make an informed decision, then you should reduce the risk of missing payments etc.
Create a personal budget
This is another extremely simple process but can make a drastic difference in your ability to manage your f inances. Most people do not keep a regular track of their financial comings and goings – if you create a budget, you can keep track of your bills, payment dates, and cash flow. You could create a budget using a program like Microsoft Excel, or one of the free budget planners you can find on the internet. All you have to do is list your weekly/monthly payments and update your monetary figures as bills are paid or money is paid into your accounts.
If you approach your finances with a clear mind and careful consideration, there is no reason why you cannot manage them effectively. This combined with avoiding the above list of 7 don’ts should put you in good stead to improve your credit score!
Bio: Lewis Murawski is the marketing and business development manager at Diem Legal and Managing Director of Kahootz Media. Lewis was previously a magazine editor at publishing giant Emap. He has since gained more than 10 years experience in SEO and digital marketing. Lewis helps individuals and businesses worldwide to increase their online profiles and maximise revenues. You can connect with Lewis on LinkedIn