Americans are obsessed with protecting our credit scores, and many of us will go to great length to keep that number as high as possible. But even financial behaviors that don't directly affect your credit score can be a red flag that you are headed towards serious financial issues.
Liz Weston, personal finance expert and author of "Deal with Your Debt," recommends consumers pay attention to signs that they are getting into financial trouble before it ends up on their credit score -- which can affect their lives for years to come. "It is really important to notice that a train is coming down the track," says Weston. "By noticing the red flags before your credit score decreases, you can take the financial steps to change your situation while you still have the time and ability to do so."
1. Taking Out Payday Loans
It seems that there are payday loan businesses on almost every street corner, television channel and radio advertisements. But you should resist the temptation no matter how tough your situation seems because the high interest rates and payment terms typically put people even further in debt. "Payday loans are incredibly toxic for your finances. Any time you consider getting one, it is a huge red flag that you are off track financially," Weston says. "When people get into financial trouble, they often use as many sources that they can to borrow money until they run out of places that will lend to them and then are unable to pay back their loans." While borrowing money from friends and family is also a warning sign of trouble to come, pay day loans are a particularly troubling sign.
2. Fighting With Your Spouse About Money
People often ignore this sign because they think it is a sign of marital issues, not financial issues. But arguing about money typically means that you are not on the same page with your spouse on financial issues. The deeper you get into financial trouble, the more often people find themselves fighting with their spouse over how to spend to money, who to pay and how to get out of debt. "If you are married to someone, then you should be a team about financial issues, and if you can't agree on the basics, then it is going to be very challenging to reach your financial goals," Weston says.
3. Paying Household Bills With Your Home Equity Loan or Line of Credit
While paying your household bills with home equity money won't show up on your credit report, it is typically a sign that you are running out of options to pay your bills. Linda Sherry, director of national priorities at Consumer Action says that it is an especially bad idea to use your equity to pay credit card debt. "Revolving debt is unsecured, so it is very risky to borrow against a secured loan, such as your mortgage," Sherry says. "If you don't pay unsecured debt, you will be hounded by bill collectors, but they won't be able to take your home or your car."
4. Bouncing Checks
If you are routinely overdrawing your bank account or bouncing checks, then you are most likely either very poorly managing your finances or in serious debt. While bouncing checks does not directly show up on your credit report, overdrawn accounts can result in a negative check writing history report, which is one of many types or specialty reports "Many people are unaware that specialty reports exist, but they can significant impact your finances, such as your ability to open a checking account and purchase car insurance," says Paul Stephens, Director of Policy and Advocacy at Privacy Rights Clearinghouse.
5. Tapping Into Your Retirement Fund
Have you dipped into your retirement accounts to pay bills, pay for emergency repairs or even take a vacation? In addition to the early withdrawal penalties, you are costing yourself the compound interest you would have earned by leaving the money in the account. "You are supposed to leave retirement money for that purpose, retirement," Weston says. "If you are even considering using retirement money to pay current bills, it is a sign that you are heading for trouble."
By realizing that you are headed down a rocky financial road before your credit report takes a nose dive, you can save yourself increased interest fees, missed opportunities and considerable stress. Once your credit report is impacted, you will see the impact of your mistakes for years to come.