Having low credit or bad credit can be a demoralizing thing. No more so than when you need that credit to secure a loan. Your credit score affects your life in a multitude of ways. Having a good credit score allows you to secure the best rates on your mortgage, your auto loans, and even when refinancing your student loans.
Most people don’t realize that having bad credit doesn’t necessarily reflect on your spending habits. Responsible people can end up with bad credit for a few surprising reasons.
Using only one credit card for everything
Many people are surprised to learn that only using one credit card and using it frequently can negatively can give them a low credit score. This applies even if you pay the balance off in full each month.
While paying off you balance in full each month is something you should definitely be doing, banks also calculate your debt risk levels with something called utilization. Utilization refers to how much credit you’re using, and not the debt load you’re carrying.
For example, if you have one credit card with a $1000 limit and you use $200 of it at all times, that’s a 20% rate of utilization. A high utilization score can have a negative impact on your credit score for two reasons: it suggests that you cannot control your spending and it negatively affects your credit limit increases. This is because banks see you as using too much of your available credit to offer you more.
To prevent this, pay your credit card down more frequently, keeping the balance above zero but still quite low. You can also increase your available credit to make your utilization percentage smaller.
Not knowing what’s on your credit score
There are many strange things that can pop up on credit reports. This is why it’s important to know what’s on your credit report by checking it at least once a year.
What’s even more important than knowing what’s on your credit score is knowing how to take action when you see something there that shouldn’t be. Reporting inaccurate information can often be done online through reputable services, or you can report the issue directly to the Consumer Financial Protection Bureau by registering the complaint online. Creditors act much quicker to remove erroneous information when the regulator is involved.
Paying collection items first
We understand, when something goes to collection the constant harassment by collectors can be downright infuriating. This is why many people pay collection items first and skip or neglect active accounts, like skipping a couple credit card payments.
The issue with this is that once something has gone to collections, the damage is done. However, your credit cards and active accounts can still damage your credit if they are neglected.
By ignoring your credit cards to pay your collection items, you may actually end up with worse credit.
Getting by when the chips are down
If you happen to be a in a tough situation and are suffering from a low credit score, you’ll still need a quick way to get money into your hands. Whether this is to cover an unexpected bill from your car breaking down, or making sure your credit cards get their minimum paid when something else goes to collections, the fastest way to do it is with a payday loan.
Payday loans are a relatively small amount of money borrowed at a high rate of interest that is meant to cover you for a short period of time. It’s important to be able to pay back your payday loan in full, otherwise you will suffer the damages of the high interest payments.