Credit scores can be confusing. But given the importance of a good score, you need to understand them so you can work on keeping them high.
A good credit rating will help open up a lot of financial opportunities. You can get a low interest on your mortgage in case you want to buy a home. The same can be said if you want to get an auto loan for a new car. It also puts you ahead in job opportunities since it will paint you as a responsible financial manager in the eyes of prospective employers. Not only that, if you plan on putting up a business, you can easily get investors to help you grow your capital funds. And as you try to grow your company, potential business partners will also look at your creditors to see if you can be a beneficial business affiliate.
When should you let your credit rating fall?
While it is evident that you need to keep your credit score high, there are instances when you have to let go of that in order to pursue a higher financial goal. When it comes to your finances, you sometimes have to make difficult choices in order to get to the financial state that you want to have. Here are some of the situations that could require you to let your credit score fall.
Debt relief program
When you are getting out of debt, most of the time, you will choose a debt solution that can help you make a significant progress on your payments. In some cases, your debt relief option will affect your credit score. Of course, you want to make sure that you get rid of debt and if that means ruining your credit report in the process, that is a sacrifice that you have to make. Obviously, you need to prioritize your debt freedom over your credit score. There are three programs that will require you to turn a blind eye as they negatively affect your credit report.
Balance transfer. Depending on the amount of debt that you will transfer, it can affect your credit score negatively. If you will transfer a huge debt amount into one card, that new account will have a high balance. That can pull your score down.
Debt settlement. Another debt relief program that will ruin your score is debt settlement. The process involves defaulting on your payments so that you can convince your creditor to allow you to pay only a portion of your debts.
Bankruptcy. This is synonymous to credit report destruction and there is nothing that you can do about it if your finances only point you towards this debt solution. Your score will go down by 200 points and your report will carry that bankruptcy stain in the next 10 years.
Cut off credit cards
Another situation wherein you have to let your credit score suffer is when you decide to close your credit card accounts. Most financial experts will tell you to own only 1-3 cards so that you can keep a tight lid on your debt. Some consumers own 5-7 cards and if you are one of them, you may have to close some of them off. This will affect your credit score – although not as grave as bankruptcy. But if you know that you cannot control your spending with all those cards in your possession, it is best to sacrifice your score for the meantime and just close existing accounts.
Application for new account
Lastly, if you need to take out a new loan to help you achieve a financial goal, that will also affect your score. The credit inquiry that happens before the loan approval and the increase in your debt amount will all affect your credit score. But since there is a higher goal, you need to let your credit score take a fall just so you can reach it.
How to improve your credit records
What you have to keep in mind is that it is okay to let your credit score fall as long as it will lead you to your financial goal. Even if it is something as grave as bankruptcy, there are things that you need to sacrifice for the greater good of your finances. Lowering your credit score is not really the end of the world. There are things that you can do to help you rebuild the credit score that you just ruined.
Here are some tips that you can use to help you regain the points that you lost.
Pay your bills on time.
Keep your balance below 35% of your credit limit.
Never borrow more than what you can afford.
Space any new credit applications so that your inquiries will be kept low.
Get diverse credit accounts: credit card, auto loans, mortgage, etc.
It is also important that you pick up the habit of monitoring your credit report. This does not have to cost you anything because the government made sure that you get one free copy of your credit report from the major credit bureaus. We have TransUnion, Equifax and Experian. That means you have three free reports that you can download for free from the Annual Credit Report website. Looking at your report will help you track your credit rebuilding progress and also let you keep an eye out for evidence of identity theft.
If you wish to learn more, watch this video to find specific tips that will help improve your score by up to 100 points.