Credit is a powerful tool that can either help or hinder your financial future. When used wisely, it can be your saving grace during tough times. On the other hand, when handled carelessly, it can change your life in the blink of an eye. Here are the top five mistakes many people make with credit and ways in which you can avoid them.
1. Failure to Check Your Credit
Just as you need to monitor your investments, it’s also important to monitor your credit. Before applying for any type of loan or opening up a new line of credit, it’s important to check and correct any mistakes on your file. It’s also important to look at your credit report every few months to make sure that your information is all up to date. Look for any accounts you haven’t opened and for any negative information that isn’t accurate. Once you find errors on your file, work with the credit bureau to correct them.
Monitoring your credit can be done by contacting the three major credit bureaus: Experian, Equifax and TransUnion. There are also other numerous resources on the Internet to help you correct your mistakes.
This will be a good measure of how much risk you carry versus how much you have available for debt repayment in the future.
2. Late Payment of Bills
The most important thing you can do with your credit card is to make on-time payments. If you can’t pay the full balance, make sure to pay the minimum amount due within a few days of the statement date. If by any chance you have a late payment on your credit report, it is bound to remain in your report for seven years. Even though new positive information may help diminish the impact on your score over time, your credit growth may still be hampered as long as the late payment is there on your report.
You may not be making your minimum due amount every month, so it’s important to determine when you can pay the full balance. This can be a tricky thing to do, as some people only make full payments at the end of every two months. You can also set up autopay through your bank account or lender, or even request payment reminders from your lenders to ensure you pay your bills on time. It’s also good to know how much you’ll need to make in order to avoid any late fees or interest charges.
3. Making Minimum Payments
Once you start paying the minimum payment each month, it is nearly impossible to improve your credit score. This is because paying just the minimum amount every month ends up imposing a higher balance on your credit card. As such, your credit utilization ratio increases. Credit utilization ratio is the percentage of the available credit at a given time. A high credit utilization ratio, normally above 30%, is known to drag down your credit score, and therefore, you should strive to keep it low.
If you’re able to pay more than the minimum payment each month, then that’s even better. The maximum amount you can pay for any given period is 25% of your available credit. So if you can afford to pay more than the minimum, then do so.
Alternatively, you can stop making minimum payments if you don’t want to carry a balance on your credit card. Once this happens, you will have to pay off the entire balance each month, which will start improving your score right away.
4. Registering For Multiple Credit Cards at Once
Normally, every time you apply for credit, a hard inquiry is run by the lender to examine your credit report. This is a great determinant of whether your application is viable and can be approved. If you apply for multiple lines of credit at the same time, then it could harm your score significantly. The number of inquiries you’ve made will be averaged and divided by the total credit limit that applies to each inquiry.
The bigger your credit score, the lower the score you actually end up with. So it’s important to limit the number of times you apply for new credit lines, especially if you’re applying for them right away and your score is already high. You should also do research on the type of credit cards you wish to apply for as well as the likelihood of your application being approved to avoid damaging your credit.
5. Closing Credit Card Accounts
Once you have an open credit card account, it’s almost impossible to improve your credit score by closing the account. If you have a balance and can’t pay it off right away, then apply for a lower interest credit card. It’s also important to keep the new balance on your account below 30% of your total available credit. .
If you need to close an old credit card, then be sure to pay off the entire balance before doing so. You will save yourself some money in interest charges from closing the account early, but it won’t prevent any damage to your credit score because of closing it.
If your credit score is already strong, then you can keep old accounts open, as long as they have a very low balance and you aren’t applying for any new lines of credit. The biggest issue with having old accounts open is that they don’t show a good history of being paid off on time.
Getting your credit score where you want it to be can take years. Even if that may sound dispiriting, taking necessary measures such as regular checks on your credit score and report, payment of bills on time, and having low credit balances can significantly be helpful in the long run. Having a good credit history also has its perks such as lower auto and homeowners insurance, cheaper financing, and much more.
