It is safe to say that bad credit generally does not happen intentionally. No one sets out to try to earn lower credit scores or damaged credit reports. Nonetheless, the unfortunate reality is that many American consumers must deal with the consequences of their bad credit on a daily basis.
Of course, in some instances bad credit simply comes about as a result of bad luck. Job loss, illness, divorce, and other unforeseen disasters can quickly take a major toll on your credit reports once the money in your savings account runs out and the unpaid bills continue to pile up afterwards. The honest truth, however, is that for the majority of consumers the true cause of their bad credit is not bad luck but rather bad choices.
“But John,” I can hear you shouting at your computer screen, “Yes, I have bad credit but I am really not a bad person.” I understand and you can rest assured that I can fully appreciate the sentiment behind your statement. Some of the kindest people you will ever meet still earn bad credit due to bad habits and, unfortunately, even if you are the nicest person in the world bad credit can still make your life much more difficult than it needs to be. No, your bad credit does not automatically signify that you are a bad person; however, bad credit does unequivocally tell future lenders that it would be a bad risk for them to lend money to you (at least not without charging you a lot more for the privilege).
It is quite possible that you may be earning your bad credit due to bad habits. After all, the way you view certain actions and the way lenders and credit scoring models view certain actions can be very different. Take a look at the following bad habits that should begin breaking now so that you can finally start earning the good credit you need to match your great personality.
1. Late Payments
Lenders care about your payment history, a lot. While you might think that making a payment late (30+ days past the due date) every once in a while is not a big deal, your lender and future lenders would disagree. Consider it from this angle. Imagine that you loaned a loved one $500 and the loved one agreed to pay it back in 5 payments over the next 5 months. How are you going to feel if that person strings you along, pays you late every month, and takes 12 months instead of 5 months to finally pay the loan back in full? He might even have legitimate reasons for not paying you back as agreed (perhaps his car broke down or he got sick), but that is probably not going to make you feel any better about loaning him money again in the future the next time he asks.
Honoring the terms of your agreement by making your payments on time is important to lenders. In fact, it is so important that the purpose – aka the stated design objective – of your credit scores is to tell lenders how likely you are to become 90 days late or worse on ANY account within the next 24 months. If you do not break the habit of making late payments, even occasionally, it will be downright impossible to ever achieve great credit scores.
2. Revolving Credit Card Debt
Another bad habit which can have a negative impact on your credit scores is consistently charging more on your credit cards than you can afford to pay off in full each month. ~30% of the points in your credit scores come from the amounts you owe others. This 30% of your credit scores is largely based upon the amount of credit card debt on your credit reports.
When you carry credit card debt from month to month you raise your revolving utilization ratio – that is the relationship between your credit card balances and limits on your open credit card accounts. As your credit card balances climb so does your revolving utilization ratio and, as a result, your credit scores will fall. It is absolutely essential to stop making excuses for overspending, stop overextending yourself financially, and start paying off your credit card balances in full each month.
3. Applying for Credit Too Often
Another bad habit which can land you in hot water with regard to your credit scores is applying for new credit too frequently. It is true that inquiries (that is the term which describes the record of when you have your credit report(s) pulled) are worth only ~10% of the points in your credit scores. However, before you decide that a mere 10% of your credit scores is meaningless it is important to know that every time you add a new account to your credit reports it reduces the average age of your accounts. That metric is worth ~15% of the points in your score.
So when you aggregate the inquiry and new account categories they’re worth a collective ~25% of the points in your scores. That’s serious. This is why it’s important to apply for credit only when necessary and not to save 15% off your daily purchases at the mall during the holiday season.