Financial decisions that lead to poor credit

Quick insights

• Intentional financial choices, such as making late payments or missing them altogether, can have negative effects on your credit score.
• Some financial situations have a longer impact on your credit than others, such as acquiring negative marks on your credit report.
• You can help improve your credit score by consistently making healthy financial choices.

Poor financial decisions can be made for a variety of reasons, such as not being aware of your current financial situation, not understanding how credit and payments work or dealing with financial and life stressors. Let’s review their impact on your credit and ways you can help improve your score.

Understanding the impact of unhealthy financial decisions on your credit

While everyone makes mistakes here and there, consistent, unhealthy financial habits can have a negative impact on your credit score—both in the short term and the long term.

Some of these financial habits include, but are not limited to:

• Applying for multiple lines of credit within a short duration
• Accumulating larger amounts of debt and not paying your balances in full
• Make a late and/or miss payments 
• Using too much of your credit, resulting in a high credit utilization ratio
• Accumulating multiple forms of outstanding debts

These can negatively affect your credit score, which is an important factor to help demonstrate your creditworthiness. If your score drops dramatically, future credit opportunities and your credit profile may be affected. Examples include, but are not limited to:

• Lower chance of approval for lines of credit
• Facing higher annual percentage rates (APRs)
• Receiving a negative mark on your credit report, which can last up to 7 years or more and significantly hurt your creditworthiness

Unhealthy financial habits can hurt your creditworthiness and it can take hard work to build that back up over time.

Why some financial choices are often repeated

One poor choice won’t necessarily ruin your credit, but you may find that you have a habit of regularly and intentionally making poor financial decisions. This can happen for a few reasons. For example, if you enjoy the feeling that comes with making a purchase, even if it’s out of your budget, you may be in a cycle of over-spending. Impulsive shopping can be a strong, psychological state that can keep you stuck in reoccurring debt and cause you to repeatedly spend more than you can afford to.

When you begin accumulating debt, you may turn towards options that could potentially harm you further, such as applying for more credit cards (which temporarily decrease your score) or taking out more lines of credit that come with higher APRs.

Additionally, you simply may not have received adequate education about how to properly manage your finances. Many people grow up without understanding what a credit score means and how it can impact them. This isn’t your fault! But what you can do is take the time to read and understand how credit works, and if you’re reading this article, you’re already on your way towards educating yourself.

Finally, you may find that external stressors and events out of your control can push you into a downward financial spiral. For example, if you were hit with unexpected and sudden medical expenses. These large and unexpected costs can be hard to recover from, especially if you don’t have an emergency fund.

How to recover from poor financial decisions

While you may feel overwhelmed by the setbacks that come with making poor financial decisions, there are ways to educate and empower yourself so that you can begin recovering.

Some helpful tips to keep in mind include, but are not limited to:

• Understand what your credit score means and regularly track it
• Review your credit report, which you can receive for free annually from the three main credit bureaus—Experian™, Equifax^® and TransUnion^®
• Ensure you make on-time payments—setting up automatic payments can help with this
• Lower your credit utilization ratio to about 30% or less
• Prioritize debt repayments by using strategies such as the debt snowball method, debt avalanche method or other debt management plans
• Create a realistic budget that you can follow consistently
• Cut unnecessary expenditures where possible, such as by freezing subscriptions

Additional strategies to help improve your credit health

Recovering from poor financial decisions also means that it’s time to set up regular, healthy financial habits, which can also help improve your credit score.

Some healthy habits to consider include setting up payment reminders or automatic payments to avoid late or missed payments, lowering your credit utilization ratio, reducing your debt-to-income ratio and keeping your account and sensitive information protected.

Remember, there’s nothing wrong with asking for help. Consider working with a financial advisor or your lender to come up with a strategy to help you build back your credit.

Utilizing credit cards wisely to build a positive credit history

As you work on building your credit, you should work on maintaining a positive credit history by using your credit wisely. This could mean making your payments on time, lowering your credit utilization ratio and paying off outstanding debts.

If you’re looking to apply for a card and build your credit history, consider looking for cards that come with low annual fees and rates. Some cards are made for those who have low credit and are working towards improving their score. Consider choosing a card that best suits your lifestyle, such as a travel rewards card if you are a frequent flyer. This can help make your purchases more beneficial if you continue to make your payments on time and in full.

Whichever card you decide to apply for, make sure you read the terms and conditions so that you are not surprised by any additional costs.

In conclusion

Regardless of how you ended up with your current credit behaviors, there’s never a wrong time to start helping improve your credit profile with some consistent, healthy habits. By making adjustments to your current financial choices, you can help improve your credit score and set yourself up for a more positive credit profile.