An individual’s credit file contains all his financial history. It includes everything from loans that he has applied for and credit card usage information, to details regarding how he has repaid the money. However, the most important aspect of this file is that it is used by lenders to establish who is eligible for their products and services. Banks, among others, use information from the credit file to calculate a rating on which they base their loan eligibility decisions as well as the value of the interest rate. Generally speaking, individuals must build up their credit ratings over time. This is done by getting loans, using credit cards, and repaying the money on time.
What most people do not realise is the fact that some financial decisions that may seem great for building up one’s credit score can be, in fact, very damaging. Today we will look at these and determine how they can be avoided.
- Using Your Credit Card too Often or Spending too Much at Any Given Time
Credit cards are financial products designed to be used for any type of expense, from groceries to paying for medical services or electronic devices. Most individuals’ use them believing that this will help them increase their credit rating, however, this is not always the case. Lenders look at how often a credit card is used and when an individual uses this form of financing too often, they conclude that he may not be able to get through the month without the extra credit. This may, in fact, lower his credit rating.
It is also important to keep in mind that the credit utilisation ratio is important in calculating an individual’s credit rating. This means that using too much of the credit that is available to you through a credit card will also lower your score. Ideally, the credit utilisation ratio should always be kept under 30%.
- Submitting a Large Number of Applications in a Short Time
When they need a loan, potential borrowers tend to submit applications to multiple lenders to find out what interest rates they would get from each of them. Unfortunately, these applications are all recorded and they can hurt one’s credit rating. If you need to take out a loan and are interested in what terms and conditions you would be offered, it is recommended to issue an informal request to the lender. Furthermore, most banks offer interest rate calculators on their websites, as well as simulation engines that enable potential borrowers to determine how much a loan would cost them and what their monthly payments would be.
- Repaying a Loan with Money Borrowed from Another Lender
While there is always the option of refinancing a loan or consolidating one’s debt, some individuals try to repay their older loans with new ones taken out from different lenders. Please keep in mind that this is not illegal, however, it will have a serious impact on your credit score. An individual’s credit file contains all the loans that he gets as well as how he repays them. This means that the lenders will understand what is happening and may not be inclined to give you another loan in the future. If you have difficulties repaying a loan and cannot consolidate your debt or refinance it, we recommend using online lending services to borrow money. These loans are usually not reported to credit reference agencies, which mean that they will not show up on your financial file as a standard loan. In most cases, it will be recorded as a regular transaction.