10 Top Credit Mistakes to Avoid

10 Top Credit Mistakes to Avoid

Want to save thousands of dollars on all your biggest purchases?

Then there's only one thing you need to do: maintain good credit.

Your credit is used to determine what rates you'll pay for big life purchases such as auto loans and mortgages. It will also influence your credit card limits and interest rates. It could even affect whether or not you get a job, as some employers do check your credit report when making hiring decisions.

For all these reasons and more, you want to keep your credit as stellar as possible. Read on to find out the top credit mistakes you must avoid.

1. Don’t miss a bill payment.

Making late bill payments, or not making them at all, can reflect negatively on your credit. In some cases, there’s a grace period, during which you won’t be penalized. In others, you may get a derogatory mark on your credit report for being 30, 60 or 90 days late. This will negatively affect your percentage of on-time payments, a significant factor of your credit score. If your payment is severely delayed, your debt may be sent to a collections agent, which will be indicated on your credit report.

What to do: Use the Money Center or set up mobile or calendar alerts to keep track of your bills and other debts owed, including credit cards, student, auto and mortgage loan payments, cable bills, medical bills, and any other regular debt obligations you have. If you aren’t prepared to make your payment, contact your creditor to find out your options. You might be able to negotiate a longer grace period for your payment. Also, some credit card companies will remove a late payment if you just ask. Write a goodwill adjustment letter, using this example at Bargaineering. 

2. Don’t max out your credit cards.

An important factor of your credit score is your credit utilization rate, or how much of your available credit you’re using at a given moment. When you apply for credit, creditors consider 30% or less a healthy utilization rate; you’re using enough credit to prove you're responsible, but not so much that you’re relying too heavily on it.

What to do: First of all, make sure you know your limits, on each card, that is. Then, calculate 30% of your total limits. For instance, if you have two credit cards, one with a credit limit of $2,000 and the other with a limit of $1,000, your total limits would be $3,000, and 30 percent of that is $1,000. To maintain an optimal credit utilization rate, you should never charge more than $1,000 total on your cards.

3. Don’t take out cash advances.

Did you know that you can take cash out of the ATM using your credit card? This so-called cash advance is a quick cash loan from your credit card issuer. While convenient, it’s also expensive. You’ll usually pay a fee per cash advance plus an interest rate higher than your credit card’s purchase interest rate by 1 to 7 percentage points. The other problem is that it can hurt your credit, depending on how much you take out. If the outstanding balance on your credit card is already high, taking a cash advance could push your credit utilization rate into territory that is bad for your credit score.

What to do: Try at all costs to avoid taking out a cash advance. Do the math to see how much you’d really be spending just to get a little extra cash to tide you over. Take a look at your credit card’s cash advance interest rate (and how much higher it is than your purchase interest rate) as well as any fees you might pay. Also consider how you can make money on the side rather than take out a short-term loan.

4. Don’t chase rates.

If you have debt, you may be tempted to open a new account with a 0% interest rate (or at least one lower than your current rate) and transfer the balance. The idea here is that you can take that time to pay off the debt without incurring extra interest (or less interest than you would have otherwise). The problem with this can be that you’ll be opening a new account, which is a "hard" inquiry on your credit report, and too many of those can lower your score. Plus, you’ll also get hit with a balance transfer fee, which is usually 3% to 5% of your transfer amount. And, if you don’t pay off the transferred balance during the introductory period, many cards require that you pay the interest rate on the entire transferred amount.

What to do: In some instances, a balance transfer could be right for you. But making repeated transfers is not a long-term solution to paying off your debt. Instead, if you have debt, create a serious plan for erasing it once and for all.

5. Don’t stop using your credit cards.

Some credit card issuers will mark unused cards as “inactive.” While they’ll remain open, the issuer might stop reporting the activity to the credit bureaus, potentially shortening the age of your credit accounts and increasing your credit utilization rate—both of which factor into your credit score.

RELATED: Why I Gave Up Credit for Six Years 

What to do: Make small charges on your credit cards each month, and pay the balances in full and on time. Or, set up a small, recurring payment on your credit card—perhaps a monthly gym membership payment—then set up mobile or calendar alerts so you pay your bill on time. If one of your cards isn’t showing up on your report, contact your credit card issuer to make sure they are reporting your card’s activity. Then, make sure to start using the card again, a little each month.

6. Don’t apply for lots of credit cards at once.

When you’re shopping around for credit cards, each application will result in a hard credit inquiry on your credit report. Each inquiry will only ding your score by a few points, but several will multiply that effect. Also, creditors who see a lot of hard inquiries on your report will suspect you’re desperate for credit, so they’ll be less likely to approve you.

What to do: Research to find the card you want before you start applying. Read credit card reviews to help guide your search. If you’ve already made this mistake, just wait: The negative effects of hard inquiries will lessen after about two months.

7. Don’t spread out mortgage or auto loan applications to protect your credit.

We talked about how a lot of credit card applications during a short period of time is bad for your credit score. The opposite is true when you’re applying for an auto loan or mortgage. Creditors understand that you need to shop around for the best loans. As long as your loan applications occur during a short period of time, they’ll be counted as just one hard credit inquiry. Unfortunately, there’s no standard for how much time constitutes a “short period of time,” but if you stay within a 30-day period, you should be fine.

What to do: Use a service like Lending Tree to compare rates on multiple loans at once. You should be able to narrow your search and minimize the time you spend researching by using a rate comparison website.

8. Don’t co-sign someone else’s loan.

When you co-sign a loan, you’re essentially using your good credit score to help another person get approved for a loan they couldn’t get on their own. And your credit will be affected by how that other person pays back the debt. If they default on the debt, your credit will suffer as well … which is why there are lots of horror stories of people co-signing friends’ or family members’ loans and having their credit ruined as a result. (Read one of them here.)

What to do: Don’t be talked into co-signing on a loan. It can be hard to say “no” to a family member or close friend, but remember that derogatory marks, like accounts sent to collections and late payments, stay on your credit report for seven to ten years. These marks will decrease your credit score and hinder your chances at getting approved for your own credit in the future.

9. Don’t forget to monitor your credit to catch errors or fraud.

Credit monitoring can help alert you to identity theft before it escalates. If you receive an email alert for a new account that you didn’t open, you’ll know right away that someone else is accessing your credit, and you can take quick action to stop the damage. However, many credit monitoring services charge $15 or more a month, which means you’re shelling out almost $200 a year for a service that isn’t entirely necessary, but an extra safeguard.

What to do: You can monitor transactions across all your accounts daily by checking them in the Money Center. Additionally, Credit Karma offers free credit monitoring, which will track your credit report daily and alert you to important changes that you wouldn’t see in the Money Center, such as new credit accounts, new credit inquiries, delinquent payments, improved payment history, new public records or updates to personal information.

10. Don’t pay for a credit repair service.

In most cases, credit repair services that promise to remove all negative marks from your credit are dishonest. Credit repair companies cannot remove accurate negative information from your credit. As for inaccurate negative information, you can dispute that yourself, without paying someone else.

What to do: Use the steps we covered in this checklist to check your own credit report for errors and to dispute them.

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