At some point in your life, you will be buying houses or even cars and all these assets require a lum sum of money to be paid. It is very likely that you will need a loan to be able to buy that asset. Credit score will be a factor in the banks deciding on the amount they can lend to you and the interest rate such that the banks will adjust accordingly to your credit score.
Building a good credit score will benefit you as you will be able to take on a larger loan, enjoy the use of credit cards and just be able to find yourself at a better position when you apply for any credit lines.
What’s the use of a good credit score?
When you want to borrow money from anyone, your credit score will play a role in deciding the loan size and interest rate. It is important that you have a good credit score to increase the chances of you getting a loan that you are happy to take on.
The interest rate can be affected badly if your credit score is bad as the bank is likely to charge you a higher interest rate as your risk of defaulting on the loan is higher than someone with a better credit score. Hence, the bank will have to use interest rate to leverage on the risk that the bank face by lending money to you.
Always repay loans on time
You should be especially careful with your bills and do not wait till letters are sent to you then you start handling the bills. Your credit score will be affected right away once you receive letters that are reminding you of your late payments.
For credit card bills, always ensure that you have paid the minimum amount, before the billing cycle ends to avoid late payment penalties. You should always pay your credit card bills every month so that you can escape yourself from the insane interest rates.
For long term loans such as mortgage or any other installment plans, try to contact the bank and inform them about your situation before hand so that they can help you to adjust accordingly. This is called debt restructuring and they will help you but your credit score will still be affected just that the damage is reduced.
Avoid multiple loan applications
The bank will deem you as someone who is “credit hungry” if you are applying for like more than 5 loans within a short period of time. This suggests that you are desperate for money and that you might not be doing well financially and you are very likely to not be able to handle all these loans.
You should try to spread out and even the loans that you are taking so that banks will trust you better as time goes and your credit score will improve as well.
Avoid having too many commitments
As a general rule of thumb, you should be looking to not exceed more than 6 credit facilities (credit cards, personal loans, etc) as they may cause you confusion of the billing cycles. You are then more likely to miss billing cycles and end up in late payments.
Always close any credit line that you are not using. For example, if you are not using that many credit cards, close all those that you don’t use to avoid the annual charge. Other than that, make sure you should not have more than one personal credit line and should you find any one that has better interest rates, close your current one before opening the new one.
Never default on loans
If you ever default on any loan, it will appear immediately on your credit report. Just one major incident of you defaulting will cause you the privilege of being able to own a credit card, get a home or any form of credit lines.
If you know that you are struggling with your payments, make sure that you inform the banks earlier so that arrangements can be made and the damage towards your credit score can be minimised.
Use your Credit Card
As mentioned in my previous article on credit cards, credit cards can actually help you to repair your credit score. This is only if you are disciplined enough to always ensure that you pay your credit card bills diligently. This process will take some time as this is just a small amount but over time your credit score will definitely improve.
With that being said, do remember that you have to be responsible in your spendings and ensure that your expense is being controlled. This is so that you will have a better time handling the credit card bills. You can also do this by setting a budget.
Protect your identity
With today’s advancement in technology, identity theft has become very common and there are a lot of victims all over the world whereby identity theft caused them a fortune. Do ensure that you do not share important information such as your credit card details, passwords and also make sure that you log out of your accounts after use.
There are many instances where hackers will get your credit card details through a dark site and steal your information. The hackers will then use your credit card to buy lots of stuffs and you are the one that is going to suffer. So do make sure that you protect your identity and report the incident to the bank and police if your identity gets stolen.
Review your credit report
You can also review your credit report annually to ensure that things are correct and that you are not being penalized for the things that you did not do. You can never be too sure about things and it is always good to check things before accepting them.
To Summarize
You are responsible for your own credit score and you have to be smart with your own financial situation. You have to ensure that you pay your bills on time and always plan your finance to ensure more security.
