Are you a high-risk credit user? What exactly does it mean if you are considered a high-risk borrower?
We all know that we cannot eliminate the use of debt completely. You can thank the presence of credit scores for that. We need to maintain a high credit score so we can enjoy certain financial opportunities. Like a low-interest rate when we borrow a mortgage for our first home.
But there are just some people who land in the high-risk category. These are the people whom creditors or lenders deem as those who are most likely to default on their loans. Their financial circumstances make it easier for them to falter in their monthly payments.
If you are one of these people, it will be very hard for you to get approval for credit accounts or loans. This is why it is a good idea for you to just take care of your credit reputation. This is done by making sure that you are responsible for the way you use credit.
But before we figure out how to become a low-risk borrower, how will you know if you are a high-risk credit user or not?
3 signs you are a high-risk credit user
There are three important signs that will confirm if you are a high-risk borrower.
Bad credit score
The most obvious is a bad credit score. For FICO scores, a bad one is 620 and below. And this is not just one-time. If you notice that your bad credit score never really goes up or keep going up and down, then that is an indication of a problem. You see, getting a good credit score is one thing. Maintaining it is another. It requires consistent effort to keep it high. The effort is basically being responsible with credit all the time. That means borrowing only what you need and paying your dues on time.
If you have a bad credit score, that means you are not practicing these responsible credit habits. These will be seen by the creditors and lenders. What assurance will they get that you will not do the same to them? They are most likely going to assume that you will do the same to them. That will get them to consider you a high-risk credit user.
Another sign that you are high-risk is when you have an unstable employment situation. It is not just your credit behavior that will make you one. It is equally important for the creditor and lender that you have the means to pay them back. Even if you were responsible while handling your past credit accounts, it means nothing if there is no reliable income that will come in to pay it off. It is not really surprising why this will make you a high-risk credit user. If it comes down to it and you don’t have sufficient funds, you will choose to buy your basic necessities rather than pay off your debts. Creditors and lenders will be considering this fact.
Based on reports, the payment delinquencies on credit cards have generally gone up. If you have a bad credit score, does not necessarily mean you have payment delinquencies. Late payments are already enough to affect your score. If you are late by 30 days, some creditors and lenders already report you. That is already bad enough. If your credit report reflects payment delinquency, that means you were already late by 180 days! That is even worse. Some creditors or lenders may even disapprove of your application. So if you want to borrow money, this is a big no-no. You have to keep your debts from becoming delinquent. If not, it will be harder to become a low-risk borrower. It is not impossible, but it will take a bit longer to correct it.
How to stop being a high-risk borrower
If you want to stop being a high-risk credit user, you need to change certain habits. This is not something that you can do overnight. You have to make a consistent effort. It is not something that you can tell your creditors. They need to see it on paper. And for that to happen, you need to implement certain habits that will slowly make you a low-risk borrower.
So what are these habits?
Make timely payments
Start by always paying your dues in time. This can improve your credit score. As mentioned, when you have a high credit score, it indicates that you are a responsible credit user. The fastest way to increase your score is by making timely payments. If you are not late in your payments, that will affect your credit score positively. For the FICO scoring system, it can affect 35% of your scores. It does not take much effort as long as you have the funds to use. Just set up reminders to ensure that you will not miss a payment. It even helps to set up auto-debit.
Monitor your credit report
Another thing that you can do is to monitor your credit report. Fortunately, this has become a common practice – at least among Millennials. Reports reveal that more than 8 out of 10 Millennials have checked their credit report at least once a year. This is a good sign. And if you are not doing it, you might want to get started.
This can be done for free. You can get a free copy of your report once a year from each of the three major credit bureaus (Equifax, TransUnion, Experian). That gives you 3 free reports. When you get a copy of your report, you can check if there are unauthorized transactions or errors. You can call it in so the credit bureaus can check it out. This will not just help you monitor your credit use. It will also allow you to stand guard against identity theft.
Be smart with your credit use
Since it is not a good idea to completely eliminate debt, it is also a good idea to just learn how to be smart with your credit use. There is no way for you to be a high-risk credit user if you know how to manage your credit.
One of the things that you can do is to always consult your budget plan. If you do not have one, it is time to get serious in using a budget. This will help you identify how much you can really afford. Unless you can pay for the credit purchase in cash, do not buy it. When you use your credit card, make sure it is included in your budget. This way, you can pay for it in full within the grace period. It will keep your credit score up while avoiding the finance charges that are usually added when you carry over a balance over the next billing cycle. If you have to borrow a bigger amount, at least, keep it within 30% of your credit limit. That way, the credit utilization rate will not affect your credit report negatively.
Have multiple sources of income
Finally, you should also secure your source of income. It is not just about having a 6-figure salary. It is about setting up multiple sources. This will help you secure your source of income. In case something happens that will compromise one of them, you still have other sources to rely on.
For instance, your day job will be the primary source of your income. But on weekends or during your free time, you can start a freelancing career. Or, you can take your love for photography, take some awesome shots, and join a photo-sharing website. If your photos are chosen, you can get paid. It is a minimal amount but it can still make a difference. If you are a good writer you can also find jobs as a freelance online writer.