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Monday, March 3, 2014

The worst financial habits that are killing your credit

By Delilah Bradford

Having good credit is really important because your credit score is used for many different things. When you apply for a job, there’s a really good chance that your employer is going to check your credit history.  You can also count on a landlord checking your credit before letting you move in, and a creditor making sure you are credit worthy before giving you on kind of loan.  Your credit score can even affect the cost of your car insurance and your ability to sign up for utilities or consumer products like a cell phone.

With your credit having such a big impact on so many aspects of your financial life, it is important to understand the different things that can affect your credit so you can make informed choices and not accidentally take steps to lower your credit score.

Bad financial habits that are killing your credit


To understand how your credit score can be damaged by decisions you make, it is essential to understand how your credit score is determined. There are several key factors that affect your score including:
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Cut credit use to improve your score
  • Your payment history: Creditors report when you make a payment each month. If you don’t pay as promised or if you are late, this can hurt your credit score. Your payment history is the single most important factor in determining whether your credit score is high or low.
  • Your credit utilization: Your creditors report the credit limits that you have on each of your cards and also report how much of the credit that you have used out of what is available to you.  The ideal ration is keeping your credit utilization below 30 percent. This would mean if you had a $1,000 credit card limit, you should not spend more than $300 on your credit card or you would exceed the preferred 30 percent ratio.
  • The age of your credit. Your credit report lists how long you have had each of your credit card accounts. Your credit score will be higher if you have had credit for a long time (and been responsible for it) as compared with if you have no credit or a very short credit history.
  • The types of different credit that you have.  You can have a lot of different types of credit including car loans, mortgage loans, credit cards, personal loans(such as those offered at LoanSource.com) and student loans. Your score tends to be higher if you have a good mix of different kinds of credit cards.
  • The number of inquiries on your credit report. Each time you apply for a new credit card or any kind of new loan, the creditor is going to check your credit score.  This is listed on your credit report as an inquiry. If you have a lot of inquiries on your credit report, that is going to have an adverse impact on your credit. An inquiry will stay on your credit report for a period of as long as two years after the time when you apply for the new credit.
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Taking the right steps means the difference between a good and bad credit score

Once you understand how your credit score is determined, it is easy to see some of the common financial habits that you may have that could be bringing your score down.  For example, some of the different financial bad habits you may have that could have an adverse impact on your score include:
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Negative financial habits can domino in to larger issues
  • Maxing out your credit cards: When you charge your cards up to your credit limits, this has an adverse impact on your credit utilization ratio. Your credit score is going to come down as lenders become afraid that you are taking on too much debt and cannot control your spending.
  • Applying for lots of new credit cards: Applying for new credit results in too many inquiries and hurts your credit score.
  • Closing credit accounts: When you close credit accounts, you affect your credit utilization ration and you shorten the average age of your credit history.
  • Paying late: Late payments have a devastating impact on your payment history and can do serious damage to your credit score.
These are just a few of the key mistakes people make.  Loans are still available to you, including car title loans, even if you have bad credit. But it is still better to make smart choices and protect your credit score in the first place. 

About the author: Delilah Bradford is a financial coach who helps others get on the path to financial success and true financial freedom. 

Images: Author owned and licensed