The purpose of credit scores are to determine the likelihood that you will pay back your loan in full. Although you may be confident you will not default on a loan, minuscule changes in buying behavior may lead a lender to believe you are a risky investment. The creation of credit scores was meant to benefit lenders and their investments, so consumers must be fully aware of what will impact their credit scores.
Credit Usage Patterns
Using the FICO formulas, reaching your credit limit will tell lenders that you are in a weak financial position. Even if you make your credit card payments on time, every purchasing decision can be grouped into a statistic. Historically, people with a high credit card balance are more likely to default on loans than those with a low credit card balance. Because lenders are unable to foresee the financial future of every customer, they rely on patterns to determine lending risk.
Cause and Effect
To improve your credit scores and safeguard them from dropping in the future, understanding the impact of buying patterns is vital. You can do this through learning the “whys” and “whats” of credit scores, also known as cause and effect. By knowing what to avoid, you will be able to steer clear of common credit pitfalls. Before you know it, your mind will start acting and making decisions like FICO software.