The keys to avoiding a bad credit history are relatively straightforward, and include taking just a few prudent steps regarding financial management. These steps include making payments on time, having a good debt-to-income ratio, and not seeking credit too often. Those who have made these mistakes may be able to recover from them, but it will take some time. Once a borrower has bad credit history, getting things turned around can be a very big challenge.
One of the quickest ways to get bad credit history is to make late payments, or miss payments entirely, on installment loans. These are loans that require periodic payments on a debt. Common examples include car payments, mortgage payments, and credit card payments. Keeping up these payments helps to show lenders that the borrower is a good credit risk who is willing to repay the debt.
Closely associated with timely payments are defaults. This is the worst-case scenario for those seeking to avoid bad credit history. In a default, the borrower cannot, or refuses to, pay his or her debt payments. The lender may try a variety of collection methods to ensure payment, including noting the late payments or default on the individual's credit history report.
Those who are defaulting on many payments might consider bankruptcy. This action can also help lead to a poor credit history, but generally anyone choosing this option likely has, or is in danger of having, several defaults anyway. Therefore, it may be a way for that individual to get back on their feet, depending on the situation. Still, bankruptcies do adversely affect credit, and they are only granted under certain conditions.
Even if a borrower makes all payments on time, a poor debt-to-income ratio could be a danger for an individual. Ideally, a borrower's debt-to-income ratio, expressed in terms of monthly payments, should not exceed 36% of monthly income. For example, if a person's income was $3,000 US Dollars (USD) per month, the total debt payments that person has should not exceed $1,080 USD. This shows lenders that the borrower is living within his or her means, and is not getting into more debt than he or she can handle.
Another key to avoiding bad credit history is not to seek credit too often. While it is acceptable to shop around for the best loan deals when seeking credit, seeking credit on a routine basis can send a warning signal to lenders. These lenders may be concerned that the potential borrower is seeking too much credit too quickly. Therefore, that could reflect negatively on the individual's credit history. Having too many credit cards can have a similar effect.