The 7 Deadly Credit Sins You Don’t Want to Commit
Religion aside, we’ve all heard of the seven deadly sins. Working at a personal finance website as we do, we got to thinking about what the seven deadly money sins would look like:
Gluttony: Trying to eat your money.
Lust: Sleeping with your neighbor’s bank account.
Sloth: Napping all day on your pillows stuffed with dollar bills.
Just kidding. But in all seriousness, there are a number of “sins” we can commit that can hurt our credit scores, ourselves and others, in the long run. Having a great credit score could save you around $100,000 on a mortgage and $6,000 on an auto loan compared with having a bad score (you can play with our interactive tool to try different variables).
And avoiding these credit sins means you have more wiggle room in your bank account to give back to others, whether you give 10% of your income to charity or whatever you can afford.
Those are just two great reasons to avoid falling prey to these—the seven deadly sins that can deep-six your credit score.
If you’re constantly jonesing for things like new summer dresses, the hottest toy for your child or a hefty collection of iTunes downloads, this is you. Losing self-control and splurging without regard for your budget and bills could mean you’ll blow the mortgage at the mall or the money for your car payment online. Most importantly, falling a little off the wagon can cause you to rack up a big balance in a hurry—often without even noticing.
(Read about this woman’s downward spending spirals, and how she gets herself out.)
Ways to repent: “Multiple studies have shown that people spend more money when paying with plastic. Cash in our hands ‘feels’ more valuable, so we are less likely to part with it,” says Karen Carlson, the director of education at InCharge Debt Solutions in Orlando, Florida. Next time you’re lusting after a purchase, wait 48 hours, then pay with cash. Research shows that by waiting you’ll be 1/3 less likely to buy because dopamine—the feel-good neurotransmitter that compels us to spend–will stop firing in your brain. In other words, your ardor for the object will dim—a sure way to combat product lust.
It’s tempting to pretend that if you can’t see your credit report, it doesn’t exist. But you could miss an error in your credit report if you don’t check it regularly, says Beverly Blair Harzog, a credit analyst, consumer advocate and spokesperson for Credit.com. A May 2011 survey conducted by the Policy & Economic Research Council says nearly 1% of credit reports have errors, and other studies cite much higher numbers.
“Any mistake that impacts your credit score could lead to paying a higher rate for a mortgage, personal loan or a credit card. You could even be denied credit altogether because your credit score is too low,” says Harzog.
Ways to repent: Check your credit report for free at annualcreditreport.com. (Don’t go to freecreditreport.com, which isn’t actually free!) You’re entitled to one free report per year from each of the three major credit bureaus (Experian, Equifax and TransUnion), so you can get your report from one of those bureaus once every four months. “The reports may contain different information so looking at a report every four months gives you a better chance to catch an error or fraud,” says Harzog. Verify your name, address, Social Security Number, each loan, credit card, balance, credit limit and your payment history.
It’s tempting to bite when a store clerk asks if you want a store credit card to save “15% off your purchase today,” but it’s financially gluttonous—and truly bad for you—to open too many credit cards at once. Every time you apply, a potential creditor inquires about your credit history, says Katie Ross, the education and development manager at American Consumer Credit Counseling. Inquiries can shave a point or two off your credit score because the creditors assume you’re looking to go a little deeper into debt. Recent inquiries account for 10% of your score.
Ways to repent: Try not to open more than one card every few months to prevent your credit score from suffering—and LearnVest recommends you cap your number of cards at three. All the same, don’t try to undo past evils by closing a bunch of cards either. Closing an account can lower your credit utilization ratio (as in, if you don’t use a lot of your available credit, you look more responsible) and hurt your score. And never close your oldest credit card because it helps the length of your credit history, another important factor in your credit score. Here’s a chart with the factors that make up your credit score.
Money stirs up powerful emotions, and emotions have the tendency to spur spending sprees. We’ve all been there: You’re angry at your significant other, recent ex or first date from last night, so you buy yourself a new dress. You’re annoyed at your sister, so you treat yourself to fancy fro-yo. You’re sick to death of your boss, so you shop online to reward yourself. We understand the feeling, but we also know that self-indulgent feelings of “I deserve this” can bomb a budget.
Ways to repent: Learn your spending triggers. Do you feel the urge to splurge when you’ve had a bad day at work? When you find something on super sale? When you’re out with spendy friends? Identify your spending triggers here, so you can break the cycle. To dive even deeper into your money psyche, take our money belief quiz to reveal your underlying assumptions about money.
Almost everyone has suffered from comparisonitis in some form or other, whether that means coveting thy neighbor’s new car, super fun job or beautiful family. In our purview, of course, is money comparisonitis: Wishing you had what someone else has, which can often lead to overspending in order to keep up with the figurative Joneses.
Ways to repent: First, find out whether you suffer from comparisonitis (by taking this quiz) and deal with the emotional roots of your jealousy (we have a four-step plan). Then, assess the financial ramifications: Have you racked up debt by overspending just to keep up with friends? If so, it’s time to take a long, hard look at your budget in the My Money Center. Then, identify the spending categories where you’ve gone over your limit in the past, and what the trigger was, whether it be too many pricey cocktails with friends or indulgent weekend getaways.
Coming face-to-face with your finances isn’t easy. If you’re struggling to afford your lifestyle or even the basic necessities, don’t be too proud to ask for help, whether that means calling a creditor to ask for a lower interest rate, seeking support from the LearnVest community by posting in our Discussions, reaching out to other LearnVest members taking a bootcamp or even getting personalized advice from a Certified Financial Planner®.
Ways to repent: Set aside your pride and ask for a payment extension or a reduced interest rate, or sign up for Get Out of Debt Bootcamp, which is a free 15-day course to start you on the path to a debt-free future. If your debt is more dire, there’s no shame in talking to a credit counseling agency. After all, the most important thing is freeing yourself from that burden–you’ll be better for yourself and for those around you.
Using every available dollar of your credit card’s spending limit does more than rack up debt. Anthony Sprauve, director of communications for MyFICO.com, says that type of greed hurts your credit score because you’ll have a large debt-to-income ratio. The closer you get to your credit limit, the less attractive you look to a potential creditor; they’ll think you’re a credit risk and won’t be enticed to offer you a new line of credit.
Ways to repent: Moderation is key. Aim to keep your total balance under 30% of your available credit. (One reader asked us how much she should use her card to have a good score–here’s the full answer.)