While none of us go into the world of credit, expecting to fall into debt and develop bad credit. None-the-less it does happen. In fact there are many times in our lives when we may be more prone to falling victim to entering into the bad credit zone.
Since this can definitely happen to the best of us – and despite our good intentions there are times in life when you are more likely to develop bad credit. Let’s take a closer look at some of the top 4 times that pose a possible threat to your finances.
1. Your First Credit Card/ Living Away from Home for the First Time
Perhaps one of the key times of life that can make or break your finances right out of the gate is how you handle the management of your first credit card. If you don’t take the time to learn more about how to properly spend with and pay off this card, it can lead to the quick onset of bad credit. Missing payments, having a credit balance that is too high compared to your given credit limit are common mistakes that many new credit users unfortunately
Furthermore, often times your first credit card can go hand in hand with going away for post-secondary education or living on your own for the first time. With all of these new responsibilities added onto your plate, it makes sense that managing your finances may also present a new and challenging chapter in your life.
In the end, the temptation to spend beyond your means and not fully understand the consequences of this spending can occur if you are new to credit and eager to test out that first credit card. As a result, it is important to be aware of credit card use at this stage of life as it can be a bad credit trap if you are not careful from the start.
2. Buying a Vehicle
Another milestone in your life that can also involve the creation of bad credit and debt, is taking out a car loan in order to purchase that new vehicle. Whether this will be your first car or you are moving up to a more expensive vehicle, either way the potential to develop bad credit might very well may be there. If, for example you take on more than you can afford and you can not keep up with the monthly loan payments, then bad credit can certainly become a rather fast reality for you.
In addition to having difficulty managing this new type of loan, you also have to consider whether or not you can afford all that owning a vehicle entails. More specifically, you also have to take into account the upfront as well as the long term costs surrounding car ownership. For instance, can you afford the costs associated with vehicle maintenance and repairs, insurance – also not forgetting how much you will have to pay towards gas?
When all is said and done, owning a car can be costly. If you are ill-prepared for these expenses, you can accrue bad credit and debt in no time.
3. Applying for a Second Credit Card
Another bad credit obstacle you will want to try and avoid is rushing into applying for a second credit card. Although you may feel the need to add more credit to your collection, this is often a method that can cause more debt, instead of helping you in the ways you thought it would.
Instead, taking on a new credit card may lead to more debt, in the event you can not afford to pay back this credit in a reasonable amount of time. This scenario can also prove troublesome, especially if you are making multiple credit inquiries too close together. This can ultimately lower your credit score rather significantly as Credit bureaus will view these inquires as proof of a borrower’s financial difficulties.
Alternatively, it may be better to think through any decisions to apply for more credit, particularly a new credit card soon after you have already taken one out or increased you credit limit. Again, the main takeaway here is that having too much credit can be challenging to repay. This reality, in combination to making too many credit inquiries can lend themselves to bad credit.
4. Becoming a Homeowner
Now this final financial milestone is not likely to be a surprise addition to this top 4 list. The reason for this – buying a home is a huge financial commitment. If the average price of Canadian homes right now is any indication of how much of a mortgage you will need to secure – then you can also be sure that if not manageable effectively, this type of loan can definitely be an entirely plausible basis for developing bad credit.
Now if you are taking on a hefty mortgage, being able to make ad down payment towards your loan may also play a large role in your ability to fend off the bad debt. Without this sizeable down payment however, you may find your are saddled with a mortgage you can not handle.
While there are rules about how much of a down payment you must make in order to secure a mortgage, making a down payment can quite drastically reduce the cost of your total loan size. In the end, a decent down payment can mean you will have less of a mortgage to pay off over time. As a result, maybe bad credit does not need to enter the equation here at all.
Once again however, beware of mortgage and the home buying process as it can be mean vast mortgages, as well as many other ongoing homeowner costs – which can very easily lead to severe debt levels and bad credit, if this crucial time of your life is not properly navigated.
As you can see, there are plenty of financial traps you can fall victim to, when it comes to accumulating bad credit. Instead take some time to learn about what can make or break good credit. Since having bad credit can present more problems when it comes to taking out loans and having the opportunity to secure more favourable rates and terms – doing everything you can from the beginning to develop good credit is the a preventative approach we should all hope to achieve.
While bad credit can creep up at any time of life, it is best to be even more mindful of those times when you may be even more susceptible to it – these top 4 scenarios certainly being some of them.