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.