The Habits That Give You a Good Reputation Can Still Be Bad for Your Finances.
You are good with credit and have even learned some tricks to improve your score . However, the last lesson everyone should learn about loans is that what is good for your credit rating is not always good for your financial health. Credit can sometimes conflict with good money habits.
Whether you like it or not, credit matters . This is also difficult. In our All You Need to Know About Loans series, we cover the basics.
For example, if you never use credit at all and avoid debt entirely, your finances seem to be in decent shape. Debt is seldom useful: it often leads to a downward spiral of increasing debt or the paycheck-to-paycheck life cycle. So you might think that giving it up entirely would be beneficial to you, right? Not when it comes to credit.
Establishing a credit history by means of a loan
Without opening a card or taking a loan, it will be difficult for you to open a loan, and whether we like it or not, we need a loan not only for obtaining a mortgage or car loan, but also for non-credit purposes. also related things. Landlords look at your credit, for example, when you apply for an apartment, and some employers do the same. And bill providers are legally allowed to charge more from customers with “risky” loans. If you have no credit at all, they may find you risky.
This is why many experts recommend opening a credit card and paying for it in full each month (however, contrary to popular belief, rebalancing a credit card is not conducive to getting credit). Just remember: being free of debt is more important than a good credit history. However, contrary to what many credit building sites tell you, you don’t need to open 20 different cards to create a healthy credit history. In fact, there are several options for creating a loan without opening a bunch of credit cards:
- Get a secured credit card instead
- Become an authorized user of someone else’s account (just make sure they have a good reputation)
- If you are helping your child make history in college, open up a low-limit card for them .
If you’re opening a card for your student-age child to help them get a loan, you can even hold on to the card so they won’t be tempted to use it.
Using a loan means you will be rewarded for higher limits
Thirty percent of your FICO score is determined by the so-called use of credit. This is the amount of credit you have compared to the amount you actually use. Ideally, you want a lot of affordable credit that you don’t actually use. The problem is, you might be tempted to use it!
By using credit, dubious financial moves such as opening multiple credit cards at the same time can actually boost your score. And closing old cards can lead to a drop in your credit score, not only because of the use of credit, but also because of your history of using that card. So if you paid with an old card and don’t want to be tempted to use it (smart money move), your credit could suffer if you close.
Loan repayment can sometimes lead to a drop in your score! As Credit.com explains , this is unique, but it happens. None of this means that you should open a ridiculous amount of cards, or keep cards open for no reason (especially if you are paying a commission), or, of course, not pay off the loan. Your result is just a number. This is an important question, but keep in mind that what really matters is your credit report and history. And if your credit report shows a solid history of paying off your debt in full and on time, it will impress lenders, homeowners and the like.
However, there are responsible ways to make your use of credit work for you. You can leave the old card open and put it away so that you are not tempted to use it. If you already have a card that you are not using, you can call the issuer and ask for an increase in the limit. Just make sure you keep track of all your open accounts.
Paying off old debts
You might think that paying off debt will help your credit history. Instead of just ignoring your huge debt, you agree to at least pay something . This should help you score points, right? Not always.
When paying off debt, you usually work with a third-party company that buys the original debt at a discount and then forces you to pay back some of it in order to make a profit. In the best case scenario, this company will agree to mark your old bill as “negotiated,” which, yes, is good for your credit history.
However, while they may do so out of courtesy, they are not required to do so. Credit expert Todd Ossenforth explains how paying off past debt can make your score worse :
When you pay off less than what is owed, your credit history will be severely damaged … if you have checking accounts now, paying off the debt will significantly worsen your credit history. The reason is that the creditor is ready to pay off the debt only for an amount less than the full amount, when they believe that collecting part of the debt is better than not collecting anything at all. If you have current payments, the lender has no reason to believe that he will not be able to receive the full amount, and he is unlikely to consider paying your bill.
On the other hand, if your debt is more than 90 days past due, Ossenforth says that a settlement probably won’t make your score worse.
Credit can be confusing because we usually think of credit score as a way of measuring financial health. But this is not the case. Your credit score measures how well you handle credit, not how you handle debt or savings. For this reason, it doesn’t always go hand in hand with good money habits.