You’re trying to move up in the world, working hard on your finances for a better future. You know at the back of your mind that everything ties into your credit score. So, you’ve done your homework on what to do to improve it; preparing for a financial journey that has you living comfortably at the end.
But hold on, your quest to improve your financial health could backfire if you’re not careful, much like accidentally succumbing to the One Ring on your way to Mordor.
All those efforts may end up reducing your credit score instead of helping it. But what are the pitfalls that you should be avoiding?
Too many credit card installment plans
It sounds like a convenient way to spread out the cost of buying what you need, and you’re not wrong. Installment plans help take the sting out of lump sum payments for expensive electronics or household appliances. They help you manage your monthly expenses and leave little room for savings.
In fact, when taken in moderation, installment plans can help diversify your loan portfolio and even increase your credit score.
However, there can be too much of a good thing and taking on too many credit card installment plans can have an adverse effect. Basically, overdoing this can undo all of your hard work.
A portion of your credit score (around 30%) is calculated based on the types and amount of debt you have. For the purpose of this article, this concerns your credit card limit and how close you get to it. Basically, the closer you get to your limit, the more it holds your credit score back.
Staying away from the limit is easy enough if you’re dealing with lump sum payments. You just look at the total bill and keep track of how much you’ve been spending.
However, extra caution must be exercised when dealing with installment plans. This is because while you are paying in installments, your card issuer has paid the full amount to the merchant. The issuer then adjusts your credit limit for the same amount; as if you have already completed your payment plan.
In other words, you don’t see it but your will be a lot closer to your credit limit than it would seem. Considering that installment plans usually apply to bigger ticket items, you could rack up a high debt-to-credit ratio very fast if you’re not careful.
Not knowing your credit score
One of the biggest dangers of trying to raise your credit score is simply not knowing where you stand. We understand, it costs money to keep checking on your score; money that could be used elsewhere.
You could conceivably have a good credit score without knowing what it is by simply following the advice of financial advisors and paying off your loans on time. This is generally how most financially responsible people live their lives.
However, not knowing where you stand could potentially lead to problems should you start trying to apply for additional credit facilities. Not having a good credit score could lead to rejected applications, which could lead to more rejections as you try to shop around for other financial institutions that may cater to your needs.
This spiraling cycle of applications is a common mistake among people who don’t understand how credit ratings work. All that happens is you apply for too many loans too quickly, which leads to the next point.
Too many loans, too soon
You might have read that taking on a personal loan can help improve your credit rating. It is true that managing a personal loan properly helps demonstrate to banks that you handle your finances responsibly and are able to meet monthly payments (especially if you manage to juggle a car and home loan as well).
Like using credit cards, doing this in moderation can do wonders for your financial health. Overdoing it could lead to negative consequences.
Financial institutions become very wary of people attempting to take multiple loans in a short amount of time. This sort of behaviour tends to look suspicious, and banks flag accounts that try to do this sort of thing.
This is not to say that you will be rejected by all the banks, but rather that they will be watching what you do more closely. In turn, this reduces your credit score as you are seen as a bigger financial risk due to your number of unsecured loans.
Instead, it is safer to space your loan applications out over a period of several months. This prevents your innocent plan to raise your credit score from looking like something more unscrupulous.
Information is ammunition
Raising a credit score is not a simple task, no matter where you are financially. It takes time, effort and patience to avoid making mistakes. To do this, you need to be able to keep tabs on your standing.
It won’t prevent you from making mistakes, but it will let you come up with a financial plan for the future. A better score might mean better chances for loan applications and possibly even lower interest rates; all of which translates into less financial stress for you. Just read our tips on how not to overdo it.
