Every financial decision you make in your life related to a credit account contributes to the calculation of your credit score. There’s no way around that, and unfortunately many of us are not aware of it until it’s too late. Few of us receive financial coaching when we’re young; rather we’re left to wing it on our own. Many of the financial decisions we make may be based in good intent, but often they fall short simply because of a lack of knowledge. We all make mistakes, but amazingly enough, most of us make the exact same ones. Maybe we learn them from our parents, who knows, but the following three basic blunders have ruined many a credit score.
Having no Insurance
Chances are, it won’t happen to me. How many times have you thought that? It’s okay to think that we if you have an unlimited amount of funds that can cover any emergency, but not many people are so privileged. Many feel that they can save more by not having insurance and use what they save to cover an emergency. That could be true in the case of a small emergency, but if something major happens, you could find yourself in insurmountable debt.
None of us like to think about accidents or death, but unfortunately they are a sad reality of life. Having insurance can protect you and the ones you love, providing for them in the case of their chief income earner being taken from them. Having no insurance, whether it’s life, home, or auto insurance, places you in serious financial jeopardy. According to the Fair Isaac Corporation (FICO), the company that first introduced the credit score model, well over 50% of accounts that are in collection are related to medical expenses.
Tapping Savings to Pay Off Debt
Whatever you do, don’t tap into your retirement fund to pay off debt. Though it may seem like an easy, quick fix, you’ll end up regretting it. Some have the attitude that their debt is costing them fifteen percent interest while their retirement fund is making five or more, so they can pocket the difference if they clear their debt. Though it is not a completely irrational option to borrow from a retirement fund, it should be done with a specific mindset.
Transferring money out of one fund to pay off another can be as easy as a few clicks of a mouse, but paying it back in might not be so easy. Generally when people use a savings or retirement account to settle debt, once the debt is cleared, so too is the need to pay the money back. They continue along in the same cycle, which usually ends up in more debt. At this point the concern should no longer be for their credit score; they should be concerned about wiping out their savings.
Lack of an Emergency Fund
This is another result of “It won’t happen to me” syndrome. We all hope it doesn’t, but the reality is, sometimes it does, and it could very well happen to any of us. Anything can happen at anytime, and it has as you well know. Many rely on their credit cards to bail them out in the case of an emergency, but that is just taking out more credit. Some say, “I’ll get a loan if something happens.” But what if you’re credit score is already in poor shape; you won’t qualify for a loan. For anyone living from paycheck to paycheck an emergency could spell disaster.
The best financial planners recommend having a specific account only for emergencies. It should be an account with at least three months worth of expenses (rent, food, transportation), and a type of account that can be accessed quickly. Sudden economic changes can result in a job loss, forcing you to drain your savings or use credit and go deeper into debt. You could find yourself sucked into a vicious circle of using debt to pay off more debt. That can only have disastrous consequences for your credit score, and there could come a time when you are denied credit completely.
It can take a lifetime to build a good credit score, but it can be destroyed almost overnight. Even if you have good intentions, failing to execute sound financial decisions could come back to haunt you. Don’t procrastinate, begin designing and implementing a financial plan that will not only save your credit score from sinking, but will protect you and your family from unnecessary dire straits.
Ethel Wilson is a financial and credit specialist with 12 years experience in the banking, credit scores, and financial industry. She has advised countless clients on how to improve their credit score rating. She now shares the best of her credit score rating information as a contributor and editor of CreditScoreResource.com.Back To All Consumer Resources