How Can My Spending Habits Affect My Credit Rating
Overspending habits can drastically lower your credit rating. In order to keep your credit history and related credit score clean only paying all your bills on time is not sufficient. There are various common money habits that can have a negative effect on your credit rating without you even being aware of it. Avoid making such mistakes so that you can keep your score high.
Few common habits that can damage your credit score include credit consolidation, debt shopping, closing credit cards and non-payment. Credit consolidation is one popular financial planning tool that is used by personal advisors and banks. It takes all of your old debts and rolls them together into one new consolidation loan. The aim behind this process is to refinance all your debts to a lower interest rate as well as monthly minimum payment. Though this can help your overall financial picture, your credit score is going to get effected while getting rid of older debt. A portion of your credit score will be determined by your open debt account with a track record of on-time payments and length of your credit history. Closing all your accounts and rolling them into a new loan can significantly drop your credit score.
Multiple requests for debt in a short period of time will affect your credit score. Such activity will indicate that you are trying to obtain new credit and it will raise a red flag on your credit report. Entering into credit dispute with a creditor or vendor and outstanding finance charges can be threatening as well and drop your credit score. Another habit that can damage your credit score is closing credit cards that you do not use any longer. Taking such a step may seem sensible, but you should understand that a part of your credit score is determined by the amount of debt you have and the total amount available to you. Having a lower ratio will have positive impact on your score.
Credit card purchases are another spending habit that affects credit rating. Credit card issuers pay close attention to spending habits. The closer your credit cards usage is to its limits, there are more chances that a card issuer will reduce your credit line and deny increases. Creditors tend to view such habits as a sign that the cardholder is accumulating too much debt.
In order to limit your credit card spending it is recommended not to use more than 35 percent of your credit line. The amount of debt you have on your credit card will affect 30 percent of your FICO credit score. So if you have high balance on your credit card, you are less prone to lower your FICO score.
When a credit card issuer will set your card limit based on your debt-to-income ratio. They will calculate the ratio by adding up your loan payments and monthly credit card and divide the total by your monthly income. The more debt you have, the lower your limit will be.
Whether you are using your current account or credit card to spend money, always think about how you are going to manage your budget and plan your debt repayments. Consider how your decisions are going to affect your future. If you are not mindful about your spending habits it can have a huge influence on your credit rating. It could also affect your ability to get personal loans or a mortgage in the future. Your credit rating may not always turn you down for credit, but your spending habits will have influence on the terms of the loan deal you are offered. Even a slight difference in your interest rate can be significant and can be excessive when calculated over the period of the loan.