Avoid These 3 Common Red Flags on Your Credit Report

Viewing word credit through magnifying glass on brown wood table.Several factors affect your credit report and score. Some negative-seeming items are inevitable; for example, applying for any line of credit gives reason for finance companies to look closer at the report. But why? Everyone has to start somewhere, and most people pay an occasional bill late, so what’s the point of deeming these items negative?

Let’s look at this from a lender’s point of view.

1. Late Payments / Defaulted Loans

All lenders wish to lend to people who can repay the debt as agreed. Imagine lending money to unreliable friends. Sure, they will probably pay it back, eventually, but you’re never quite sure when to expect the repayment. You also can’t count on reinvesting that money any time soon. So, when a borrower fails to pay as agreed on anything, their risk goes up and their credit score goes down. Lenders are all about limiting risk, so most companies are going to avoid such people rather than giving them a second chance. They do not want to be chasing down unreliable consumers because it is costly to them.

Now, some lenders are in the business of giving risky borrowers a second chance. However, their fees are often considerably higher due to the risk associated with giving bad or no-credit loans. High fees allow banks to put more money toward debt collections and dismiss hopeless debt.

2. High Percentage of Revolving Balance

A revolving balance is how much you’ve placed on a credit card or borrowed from a line of credit. If you can’t pay off the balance each month, it’s best to keep the percentage of total credit used low, at about 30 percent or less of the credit limit. For example, a credit line of $1,000 shouldn’t have more than $300 used after your monthly payment. Anything above 30 percent is generally considered suboptimal and a high balance. Low balances are very beneficial to your credit, while higher credit utilization (like 50 to 100 percent) will bring your credit score down a bit.

From the lender’s point of view, anyone carrying a high balance is doing so because they can’t afford to pay it off. This is probably true for the most part. Being unable to pay the entirety of a balance isn’t altogether bad. It’s certainly not as impactful as paying the balance late or not at all. However, it is questionable to seek additional credit while maintaining a high balance on current lines of credit and loans. If you can’t pay the previous ones, lenders believe it will be risky to extend even more credit to you.

3. Recent Applications for New Credit

All formal applications for new credit are reported to the credit bureaus. You could almost say lenders negatively view people seeking multiple lines of credit, especially when those people have relatively new credit lines or loans already, and are carrying balances on those loans. Typically accounts opened or applied for within the past two years are considered new. It’s a red flag because it seems as if you need additional loans to help pay off the old ones. This could mean you don’t have the means to pay back the original debts.

However, credit scoring algorithms are generally lenient with people who apply for several lines of credit at once, rather than spacing out their applications over several weeks. This is an indication of someone shopping for the best deal, which is a smart financial decision. Make it obvious that you’re looking for one new line of credit, not applying on a whim to see if anyone bites or applying to open up several of them.

Final Thoughts on Avoiding Red Flags on Your Credit Report

When monitoring your credit it’s important to view your financial situation from the lender’s point of view. After all, they’re focusing on their best interests, not yours. Few financial institutions are in the business to do you more favors than them, so keep on top of your credit score by avoiding red flags whenever possible. The occasional red flag is all but inevitable, but consistent, responsible money management will set you apart from the rest of borrowers.

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Posted on March 5, 2021 by in Credit Monitoring

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