Intuition and common sense can let you down if you use them to make credit decisions. It would seem that an overdue loan is the worst thing that can ruin your credit history. However, even when paying a cash loan, you can spoil your reputation. My loan repayment strategies have led to trouble. I figured out the reasons that led to this, now I always adhere to 3 simple rules.
First, I’ll talk about some reasonable credit decisions that can lead to the opposite result, and then I will share simple rules that should be followed.
Mistake number 1. Always pay on time
When using a credit card, I always tried to make the next obligatory payment on time in order to avoid delays. Sometimes for the sake of this, even had to abandon the planned expenses.
Later, I learned that timely credit card payments are not the most important factor that affects your credit history.
According to experts, it is better to try to use as little money as possible on a credit card. Ideally, no more than 30% of the limit, but the smaller this figure, the better.
Needless to say, after making the next mandatory payment, I almost immediately spent this money on a credit card. As it turned out later, this is a big mistake. When a client constantly uses credit funds from a card, this indicates that he cannot service his credit. For the bank, this creates an additional risk associated with the return of funds.
What should be done instead? First of all, make sure that you use no more than 30% of your credit limit during the billing period. You can make several small payments during the month to keep the debt level stable low relative to your limit.
Mistake number 2. Closing a credit card
You might think that a credit card that you do not use turns into useless plastic. For this reason, you decide to close it. I also thought so and closed my card, not even realizing that this worsens my credit history.
It turns out that closing a credit card reduces your overall credit limit. The next time you apply to a bank for a loan, you may not receive the requested amount.
What should be done instead? Keep your credit cards open unless you have a good reason to close them. If you do not need a credit card, but it has a high credit limit or has been open for a long time, you can use it to make small purchases and then repay the debt on time. Regular use of a credit card protects against closing an account for inaction.
Mistake number 3. Early repayment of a loan
Some borrowers are firmly convinced that having closed a loan ahead of schedule, they will improve their credit history. However, in practice this leads to the opposite result.
Early repayment of a loan does not improve your credit rating. This is due to the fact that with an early repayment of a money loan, you deprive the bank of a portion of the profit, which includes interest on the use of funds. The sooner you repay the debt, the lower the overpayment. This is beneficial to the borrower, but not to the bank.
What should be done instead? Focus on what is best for your finances. If you have a loan with a low interest rate, there is no big incentive to pay early.However, if the interest rate is high, and early repayment promises you impressive savings, why not?
Error number 4. Partial payment
There is a persistent myth that paying at least a small amount, even if you cannot make the entire payment, will not ruin your credit history. I, like most people, thought that a lender would rather have a partial payment than nothing.
However, in practice, this is not so. This is an erroneous strategy that will not protect against delay. If you pay at least a penny less than the established payment, the bank may consider this a delay and transfer the information to the credit bureau.
What should be done instead? If you really cannot make the payment, discuss the situation with a bank representative. You may be able to agree on a respite. Similar situations are resolved individually.
Mistake number 5. Refusal from a higher credit limit
The more loans you have available, the more likely you are to get into debt. Arguing in this way, people refuse the bank’s offer to increase the credit limit. However, they do not even suspect that this worsens the credit rating.
A higher credit limit is usually a good thing, especially if with its increase you will not increase the temptation to overspending.
What should be done instead? Accept more offer to increase credit limit. However, keep your own expenses under control.
3 simple rules
Now you know which loan repayment strategies are causing trouble. It is time to discuss simple rules that you should follow.
Creating a good credit history can seem like a daunting task. It is influenced by several factors at once. Knowing what is important, and acting accordingly, you can get a good result.
Just follow the three rules:
- Pay on time every time.
- Use less than 30% of your credit limit.
- Keep track of everything else.
“Everything else” means the accuracy of your credit reports, the term of your loan, the amount of your loans. However, these factors are much less important than timely payment and low credit utilization.