The Relationship Between Your Spending Habits and Credit Health
When it comes to improving your credit score, you may see a lot of articles that tell you to make your payments on time, settle your most expensive debts, and maintain your oldest account.
But many of these guides fail to mention that these actions are directly related to the way you spend your money.
It’s because when you spend your funds wisely, it allows you to keep up with all the necessities of debt management without stretching yourself thin. In contrast, any expenses that occur on your accounts without proper planning can drag down your credit score in more than one way.
To help you learn more about this crucial financial lesson, here’s an explainer on the relationship between your spending habits and credit health.
How Do Your Spending Habits Influence Your Credit Score?
Your credit score is calculated via a number of factors. Some of them hold a greater weight than others. But when put together, it comes down to a complex calculation that involves different aspects like timely payments and a combination of credit products.
You can think of these complexities as being similar to calculating how much money you need to save for your emergency funds and what factors influence the final amount you need to put together for it.
Not Budgeting Gets in the Way of Your Payments
First and foremost, if you spend your money without budgeting, it can result in delaying the monthly payments you need to make for your loans and credit cards.
This not only hurts your mortgage FICO score in the long run, but also holds the potential to eventually send your payments to collections.
This can further affect your credit score, mark a bad point in your credit history, and make it difficult for you to secure new loans when you need them the most.
Impulsive Purchases Deplete Your Credit Cards
If you are one to buy anything and everything that passes your eye, you may want to rethink that approach. It’s because when you make impulsive purchases, they can deplete your credit card balance and increase your credit utilization ratio.
This ratio should be no higher than 30% of your total approved credit. According to some experts, it should be lower than 10%. By adopting practices like maintaining a budget planner, you can steer clear of using all your approved credit every single month.
Spending Big Amounts Results in Additional Credit
In case you like to spend your money like royalty while not having virtually endless coffers to your name, it can lead you to seek new credit products.
Similar to how the right access control system keeps an access log for your security, whenever you apply for new credit, it creates a “hard inquiry” on your credit report that stays on it for up to two years and affects your credit score for a year.
That’s why it’s important that you spend your money carefully in order to only utilize credit products that you need.
Superfluous Expenses Can Make It Difficult to Identify Disputes
It is a common experience to have misreported data on your credit report and see it affect your credit score. For example, if you made your payments on time but still see them showing up as delayed payments, you need to bring this to the attention of credit bureaus.
However, if you make too many transactions, it can be difficult to keep track of them. Similar to companies that are careful about their cybersecurity marketing strategies, you should make sure to spend your money with the utmost care so you can keep tabs on your credit report.
Missing Payments Can Close Your Oldest Account
When you miss your payments, you run the risk of getting your accounts closed by your lenders. This directly has an effect on the average age of your credit history. Since maintaining a higher age for your credit history is positive for your credit score, closing your oldest accounts directly affects it.
By using solutions like a digital budget planner, you can keep up to date with your payments. You can also use a reminder app to make sure you make all your payments on time and without any failure.
With this guide, you can easily understand how your spending habits influence your credit health. From there, you can feel a newfound motivation to control your spending and build a better financial future.
