In a world where it’s becoming more and more the norm for people to be in the minuses when it comes to their bank accounts, it’s important to recognize that sometimes, a loan or credit card doesn’t necessarily need to be the enemy of your credit score.
It’s commonly asserted that if you have debt, it’s automatically going to be bad for your credit rating, but actually, when it comes to credit, there’s nothing intrinsically damaging about taking out a credit product. In this article, we shed some light on the mystery that is your credit score, and explain how even short-term, high-cost credit isn’t necessarily the enemy.
Understanding Your Credit Rating
Your credit score is a score representing your entire credit history up to this moment in time, and credit providers will use it every time they want to assess whether you’re financially trustworthy enough to be worthy of that product. If you want to access to your credit report, you need to sign up to a provider like Experian that will give you the breakdown of why your score is the way it is.
Once you have access to your report, you’ll be shown which factors are helping your score, and which are to its detriment. From here, you’ll be able to implement score-improving strategies that will hopefully result with an increase in your ability to take out more credit products.
It’s What You Do With the Credit That Matters
When you take on credit, many would claim that this automatically has a net negative affect on your credit score. In other words, this belief suggests that credit equals debt, and that the result of this will be that your credit score will lower. However, this isn’t necessarily the case. The crucial thing you need to remember is that debt in and of itself doesn’t affect your credit rating; it’s how you handle your debt that’s important.
Short-Term, High-Cost Credit
Take, for example, short-term, high-risk credit like a short-term loan. As this report by Different Money confirms, if you have a loan like this for a legitimate reason, and you are paying it back as you should, there is no reason why you should be penalized for your credit.
Ultimately, your credit score is affected by how you handle your personal finances. If you want to take out a short-term, high-cost credit product, you won’t be penalized if you honor the agreement, but if you let payments slip, you’ll soon see your credit score dip.
AUTHOR Derek Sall
Derek has a Bachelor's degree in Finance and a Master's in Business. As a finance manager in the corporate world, he regularly identified and solved problems at the C-suite level. Today, Derek isn't interested in helping big companies. Instead, he's helping individuals win financially--one email, one article, one person at a time.