Credit ratings are very important when we apply for loans. How we fare in our credit scores would tell the lender how we do in paying our debts and would tell if we would be able to pay off for the loan. Credit ratings also help the lender determine how much interest rate he is going to charge: the higher our credit scores are, the lower our interest rates will be and the bigger our savings.

So, how does one end up having bad credit?

When we fall behind repayments of a loan or a debt, arrears can start to pile up and our credit scores start spiraling down. This could be a very hard time for us, especially when there are also other things to pay, like the groceries, rent, and other bills.

There are also other factors that lead us to missing payments. One such is when a personal or family tragedy happens. Although it is something not intended, such an accident could be a big financial blow on any of us. Death and illnesses in the family do not only drain us emotionally; it also drains our resources and savings.

Job loss could also be a factor that leads to miss monthly payments. Paying loans and other debts could become even harder if we lose a steady source of income and not having one anymore could lead us to incur more debts to pay off other debts. Before we know it, we are already stuck in a great pile of debts.

Avoiding bad credit

Although these things are inevitable, we can always do things that to avoid bad credit rating at the very beginning.

The best way is to avoid borrowing some money in the first place. If this is not possible, then do not borrow too much. Borrowing a lot of money from too many creditors can lead to confusion, thereby making it easier to miss payments on some debts. This is because we become too focused on paying a particular set of debts that we end up paying attention to other debts in the background.

Sticking to a budget and avoiding unnecessary spending would also help a great deal. We must also avoid using our credit cards to make purchases on our “wants” and avoid getting lured into getting something merely because of good sales talk. Monitoring our expenses would help a lot in changing our spending habits.

There are many other ways to avoid the pitfalls of getting bad credit – it just depends on how we plan and manage our finances.

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