You must know what a credit score is and how a good and bad credit score is differentiated. Further, you must also know how a credit score can affect your daily life. There are certain practices which may have led you to a low score. A good credit score is not just important when you apply for a new credit line; there are other ways in which it influences your routine. Therefore, maintaining a good credit score throughout your life becomes essential.
1. What practices lead to a low credit score?
- Over-Utilisation of Credit Limit: The rule of thumb while using credit cards is to keep the utilisation ratio within 10%-30% of the provided credit limit. If you spend more than 30% of the credit limit, it will hamper your credit score. It states that you are too much dependant on your credit card.
- Missed Payments: Payment history is a critical contributor in determining a credit score. A 30-day late payment can drastically change your credit score. This will count as defaulting payments and can have numerous consequences.
- Multiple Loan Applications in a Short Time: Applying for a loan with various lenders within a short period shows that you are desperate for money. When each of these lenders sends an enquiry request about you to credit rating agencies, the enquiry details will be recorded in the credit report. This can act as a sole reason for lenders to reject your application, in turn, drag your credit score to the bottom.
- Negative Account Information: Your credit report contains information, such as foreclosure, repossession, bankruptcy, charge-off, or settled accounts. Any of the above-stated account statuses can severely hit your credit score for years.
2. How does a low score affect your daily life?
- House or Car Purchase: A good credit score is necessary to get a reasonable deal while you are looking for a home or car loan from a bank/financial institution. A good score can get you a lower interest rate, more significant loan amount, longer repayment period, and a better probability of loan approval. In the case of a low score, your loan application may be rejected. There are possibilities of lenders imposing a higher interest rate than usual and/or offering a smaller loan amount than what you require.
- Relationships: Knowing your credit score can make or break ties. Your business partners may lose trust in you and may want to get rid of you from the business. Your friends may avoid you thinking you may ask for their financial help in the future if you continue to handle finances poorly.
- Credit Card Limit: If a lender knows that your credit score is regularly dropping, he may reduce the limit on your credit card. This is to keep you on check while spending, so you need not pay a huge bill later. If you continue to spend without considering the reduced limit, your credit utilisation ratio will rise and negatively affect your credit score further.
- New Business: Though you have a fabulous, most-realistic business idea, you may need a business loan to make your idea into a reality. Your previous financial behaviour can make it tough to live a bright future. A low credit score means you have failed to pay the bills on time. Now, your lender may not trust you with the money, making it tough for you to raise capital investment for your business.
- Debt-related Calls: Your score states if you pay your bills on time or go over the due dates. When your score is low, it shows that you have been delaying payments or even defaulted payments. In this case, lenders try to get in touch with you reminding you of the payments. If you do not respond to their calls, legal notices will be sent to you. All these reminders will create chaos in your daily life.
It is better to keep your daily life in your control and not let lenders take control over your peace of mind. Make payments on time to keep your score in check. If you are genuinely going through financial hardships, it is recommended to inform your lenders and request for some time before you start repaying. This can avoid chaos. It takes a lot of time and effort to build your credit score back up; take care of it.