Are you trapped in a vicious spending cycle and blow your cash on things you can’t afford? In January 2013, New Zealanders put approximately $5.6 billion on their credit and debit cards, with the average person charging $52 to their credit and debit cards. During the month, $638 million was spent on hospitality and $285 million spent on apparel. With these figures in mind, it’s easy to see how spending can get out of control.
But what are some of the worst spending habits and how can they negatively impact your credit file?
Impulse buying refers to unplanned purchases, made on a whim without contemplating the consequences of that purchase. Impulse buying, which is a relatively common trait in today’s age of consumerism, is closely linked to emotions – when people are upset or happy, they are more likely to buy on impulse. However, this can often lead to a spike in expenditure that can often exceed the amount you earn. Not many realise it at the time, but this bad habit can cause you to dip into savings, borrow from others or buy on credit. In the worst case scenario this can leave you with no savings and a pile of debt that you can’t pay off.
The impact on your credit report is significant – unpaid debts more than 60 days old will be listed on your credit file for five years, even after the amount is paid in full.
Being addicted to credit is never a good thing, as it means all your purchases – even those under $10 – are bought on credit cards. Credit addicts also use their cards over cash, even if they actually have the cash in their pocket. While using credit cards is a great way to earn reward points, the problem lies with putting too much on your cards without paying off the balance in full or going over the limit.
A failure to pay off credit card balances not only result in defaults being recorded on your credit report, but may also result in the chance you will get rejected for credit in the future. Lenders look at your credit report to assess your level of creditworthiness, and if there are bad marks on your report, you may not be approved for new credit.
Are you someone who uses your credit cards to pay down loans and other debt? Or perhaps you continually transfer your credit card balance to another card with a lower interest rate? If the answer is yes, you are a debt shuffler. Using debt to pay off debt is a dangerous habit as you’re just shuffling your debt around without actually paying anything off. Your credit card will eventually need to be paid, even if you keep transferring your balances to a low-interest or lower limit account.
This habit can lead to a record of multiple credit card applications or enquiries over a relatively short period of time, which will be shown on your credit report and signals to lenders that you may be a high-risk applicant. Furthermore, new credit reporting reforms also mean that credit limits, type of credit account and open/closed dates of your credit accounts will be recorded on your file. For debt shufflers this is significant as it means lenders can see how long you’ve had an account for, and how much credit you’re granted.
Next week, we talk about how these three bad spending habits can be stopped so that you can get your life back under control.