29 Aug 2022 ANKIT CHADHA

Credit Score – Important Indicators of Your Financial Health

Important Indicators of Your Financial Health | TRC Consulting

Your credit score is one of many important indicators of your financial health, it's critical to establish and maintain good credit habits. 

If you've ever tried to buy a home or a car, or even open a credit card account, you're well aware of the importance of credit scores in lending decisions. When you apply for credit, lenders and creditors use your credit scores and the information in your credit reports, along with other criteria, as part of their decision-making process when evaluating your application. It may be simpler than you think to harm your credit scores.  

Maintaining your credit score necessitates careful budgeting and attention to detail. Even the most astute consumers make simple mistakes that can have a significant impact on their credit scores. Here are five credit score blunders that even the most knowledgeable people make. Being aware of these may assist you in avoiding an unnecessary drop in your credit score. 

Here are five possible outcomes:

  • Failure to pay bills on time 

Your payment history has a significant impact on your credit scores, so missing even one payment can have a negative impact on your credit.  

The good news is that late payments on loans and credit cards are only reported if they are 30 days or more late. While being one day late may result in fees and penalties, getting current on your account before the 30-day mark will not harm your credit. 

If you have a late payment on your credit report, it will stay on there for seven years. While the impact on your score may diminish over time as new positive information is added, it can still hinder your credit growth for the duration of its presence. 

Request payment reminders from your lenders or, even better, set up autopay through your lender or bank account to ensure you pay all of your bills on time. Simply ensure that you have enough money in your bank account to cover your bills each month. 

  • Applying for Multiple Credit Cards at the Same Time 

When you apply for credit, the lender will run a hard inquiry on your credit report. This helps them decide whether or not to approve your application. Multiple inquiries in a short period of time usually won't hurt you much when it comes to certain types of loans, such as mortgages and auto loans, because they're all counted as one inquiry when calculating your credit score. 

However, that is not how credit cards work. When you apply for several credit cards in a short period of time, each inquiry usually counts against you. In general, one more hard inquiry may reduce your credit score by a few points, if any. Multiple inquiries, on the other hand, can have a compounding effect on your credit score, making creditors view you as a riskier borrower. 

There are other risks as well: 

Spending on impulse:

With the ease of shopping online and credit cards providing irresistible offers, it is easy to overspend. If you lack financial discipline, you may accumulate a large debt with multiple credit cards that will be difficult to repay later. Furthermore, applying for credit cards on a regular basis can have a negative impact on your credit score. 

Difficulty in Card Management:

You may forget your credit card payment due dates if you are not prudent in managing your finances in a disciplined manner. Failure to pay your credit card bills in full on time results in high late payment charges and penalties, which can also harm your credit score. 

So, how many cards you should hold?

One of them will be your primary card, which may offer fewer rewards but is consistent across all categories. For example, instead of choosing a card that offers 5% cash back on groceries, your primary credit card should offer 1% to 2% cash back or reward points on all purchases. 

Your second card can be chosen based on your lifestyle. If you frequently travel by car, for example, you can choose a card that offers a fixed percentage of cash-back on fuel purchases and a fuel surcharge waiver. 

On the other hand, if you are organized, have good financial discipline, and want to get the most out of your credit card offers, three credit cards is a good number to have. It increases your credit limit, provides alternative cards to use in the event of an emergency or a technical issue, and improves your credit score if you maintain the credit utilization ratio. Furthermore, three is not a large number that can be difficult to manage. If you manage your three cards wisely, you can get the most out of them.  

  • A high debt-to-credit-utilization ratio

Another factor used to calculate your credit scores is your debt to credit utilization ratio. This ratio represents how much of your available credit you are using in comparison to the total amount available to you. In general, lenders and creditors prefer to see a lower debt-to-credit ratio (below 30 percent). 

Opening new accounts solely to lower your debt-to-credit ratio is rarely a good idea. This may have two effects on your credit scores: the hard inquiries resulting from those applications (more on hard inquiries below), and the new accounts themselves, which may reduce the average age of your credit accounts. It is best to only apply for credit when you need it. 

  • Credit card account closure

It may be tempting to close a credit card account that has been paid in full, but doing so may have an impact on your credit score. Closing the credit card account may affect the mix of credit accounts on your credit reports, in addition to your debt to credit utilization ratio. 

 In general, lenders and creditors want to see that you've handled various types of credit accounts correctly over time. Closing a credit card account that you've had for a while may also reduce the length of your credit history, which may have an impact on your credit scores. 

  • Making Only Minimum Credit Card Payments 

Paying only the minimum amount due on your interest-bearing credit cards will cost you more money in the long run than paying off all or most of your debt every month. It can also harm your credit if you are not careful. 

Because if you only make the minimum payment each month, you may end up carrying a large balance on your credit card. This raises your credit utilization ratio, which is the percentage of available credit that you are using at any given time. The amount you owe is another important factor in your credit scores, so if left unchecked, a high utilization rate can cause significant damage. A credit utilization ratio of more than 30% can start to lower your scores, but the lower it is, the better. 

Paying down your balances so that they are all under 30% utilization is a good place to start. If you have a large amount of debt, consider using the avalanche method or snowball approach to pay off your credit card balances. 

 Frequently Asked Question 

1. How do I close a credit card account permanently? 

Make your balance zero, then call your credit card company to cancel and confirm that your account balance is zero. To cancel the account, send a certified letter to your card issuer. Request that written confirmation of your zero balance and closed account status be mailed to you in this letter. 

2. Is it bad to cancel a credit card? 

This is entirely dependent on the credit available on your card. When you close a credit card account with a high credit limit, it may have a negative impact on your credit score, especially if you have a high balance on your other cards and loans. To ensure that cancelling your credit card does not harm your credit score, pay off all other card balances. 

3. What are the indicators of financial health? 

To accurately assess a company's financial health and long-term sustainability, several financial metrics must be considered concurrently. The four major areas of financial health that should be examined are liquidity, solvency, profitability, and operating efficiency. Profitability, however, is the best indicator of a company's health of the four.

 

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