Much has been discussed about your credit score; Do insurance premiums affect a credit score? Can multiple loans affect a credit score? Why is my credit score important?
We know now that a credit score is indicative of your spending behaviour or, rather, how quickly you pay back loans and monthly payments consistently.
But, what about certain life events in your life that you cannot predict such as a divorce, rising interest rates, or a pay cut?
This can affect your credit score tremendously, so it’s important to be prepared for all possibilities.
4 Life Events You Need To Prepare Your Credit Score For
Divorce can also bring financial heartache. Especially if you and your former spouse had a joint credit card account, or both signed off on a mortgage or car loan.
Dealing with those debts should be a top priority. Your first point of order is to close any joint accounts immediately. As a joint owner, you will be responsible for any charges, even if you didn’t make them.
If you have a car or home loan together, either partner should take over payments (in writing) or the asset should be sold.
2. A Pay Cut
If your company is going through retrenchment and downsizing, a pay cut will affect your ability to pay back all your current monthly payments on time.
Effective ‘Emergency Saving’ can help you out in your time of need and ensure you do not miss a payment, which could affect your credit score tremendously.
3. Rising Interest Rates
Credit card interest rates are tied to the Prime Rate (the interest rate banks charge each other for short-term loans). As a result, your credit card interest rate can rise or fall.
While the change in interest rates may not affect your credit score, it will certainly affect your ability to pay back debt and all monthly payments. If a larger part of each payment goes towards interest, you will need more time to pay off debt (or sell any assets you can no longer afford).
4. Cancelling Credit Cards
While getting rid of any temptations to spend money, such as a credit card, may sound like a good move; it may negatively affect your credit score.
Credit scores are based on credit data, which means if you don’t have any credit, there is no data to determine a suitable score. Your payment history carries a substantial amount of weight with your score. Of particular interest to creditors would be the last two years of spending.
If your payment history fades from memory due to cancelling a credit card, you could lose points, instead of growing them.