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How we make financial decisions and how they affect credit score

How we make financial decisions and how they affect credit score

Psychological research says that the biases you have lead you to make financial blunders that can have major effects on your wallet.

Psychological research says that the biases you have lead you to make financial blunders that can have major effects on your wallet. Financial decisions are vulnerable to many of the same faults that cause people to make mistakes in other parts of their life. Trusting the wrong people, reading too much into the current situation and looking for the safest path are example of the ways our brains have developed to save our bodies from harm but possibly do the opposite to our savings accounts.

Erroneous financial decisions

People fall into one of four basic money belief patterns that can help say a lot about how you think about money. Some people avoid money and generally try to live a life that has very little to do with money. There are those who believe that money is something to be worshiped and that money can make their problems evaporate. Many people associate status with money and have a strong tie between their self-worth and their bank account. Then there are those who are vigilant about making sure that their bills are paid and they have no outstanding debt or risk. Whatever category you fall into can tell a lot about what sort of biases you are vulnerable to when it comes to your financial decisions.

Human error happens and knowing what errors you are most likely to make based on your biases can protect you from yourself and your belief pattern. Hoping that the same outcome will happen to a game of chance is irrational thinking. Behavioral biases will cause you to think that just because a stock or fund has been doing well in the last few quarters that it will continue to keep doing well when it might not. Your financial personality will lead you astray over and over again when you make the same bad financial decisions like letting a good looking sales person talk you into a personal loan that can potentially ruin your credit score. Knowing yourself is your best defense to your own behavioral biases and if you know you have a credit file with a less than perfect history then you should think twice about taking out a new line of credit. Knowing yourself might also mean that you should think about taking risks in the stock market because you are young enough to do so.

Do not let your behavioral biases get in the way of your financial decisions and possibly harm your credit score. Look into your credit file and try to find how your own thinking might have been your worst enemy and do your best to use behavioral studies to help teach yourself how to manage money better.

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