Unfortunately for many of us, VISA really is everywhere we want to be. Thanks to impulse purchasing and poor budgeting habits, the convenience of a credit card often causes us to spend a bit more than we should. In fact, according to CNN, the average household in America had $15,950 in credit card debt in 2012. On average, that debt was subject to interest rates that were in the mid to high teens (and sometimes even higher). This may be great news for credit card companies, but it is certainly bad news for consumers who struggle with money management. Worse still, while things like not paying your bills on time can be a clear way to damage your credit, there are a number of less-obvious risks to your credit score.
On the bright side, credit card debt is not insurmountable. By recognizing the credit mistakes you are making, you will be better prepared to manage your expenses and rebuild your score. The following are some of the most common mistakes made by credit holders. Avoiding these mistakes in the future can help your debt seem less like a mountain, and more like a molehill.
Credit Mistake #1: Not Checking Your Credit Report Each Year
Checking your credit report regularly is important. Most people may not be aware that the Fair Credit Reporting Act (FCRA) requires the three major credit reporting agencies (Equifax, TransUnion and Experian) to provide you with a free credit report once per year. While you must request the report, you need not worry about paying to check your score. As a note of caution, be sure to check your score with all three agencies, since one agency could have information about your credit that was not reported to another.
Not only does regularly checking your score help you to understand how creditors see you (and whether or not you’re eligible for things like credit card transfers) but it also helps you to stay on top of things like identity theft. In addition, contrary to popular belief, checking your own credit report has no negative effect on your credit score.
Credit Mistake #2: Closing Your Accounts
When you are trying to get out of debt, it can be tempting to cancel all of your accounts, cut up your cards, and even toss that high-limit MasterCard into a burning fire. This move can seem attractive, but closing your accounts can really hurt your credit score. According to MSN, one of the presumed factors of your FICO credit score is your ratio of credit used to credit available. If you have $4,000 in credit card debt, but have $25,000 in available credit, your ratio is comparably good and you may be rewarded with a higher credit score. When you close accounts, you also reduce your available credit: your ratio may suddenly look something like $4,000 dollars in credit card debt and $5,000 dollars in available credit. This kind of ratio will hurt you and can result in a potentially lower credit score.
Credit Mistake #3: Making Only the Minimum Payment
Most people assume that making any kind of payment on open balances will improve their credit. However, making the minimum payments on a credit card is a lot like running on a treadmill: it gets you nowhere. In fact, per the Federal Reserve, a person who pays the minimum payment on a $9,000 credit card bill with a 15 percent APR will ultimately pay $13,913 in interest alone. Not only this, but it’ll take 31 years to fully pay off. Your risk as a borrower may also seem higher if you have a large number of open accounts with balances remaining. According to Jane McNamara of FOX Business, a “good rule of thumb to assure your credit score remains high is to keep your credit card balances as low as possible.” This means taking steps—or paying more than required—to make a serious dent in your remaining balances.
Credit Mistake #4: Using Your Credit Card When You Shouldn’t
There are some things that necessitate the use of a credit card: big ticket items, like televisions or furniture, for instance. Yet, some people opt to use their credit card for everyday items. This may include: buying dinner, getting gas, or paying a doctor office copay. While this may be convenient and can help you get started building your credit, using your credit card to routinely make small purchases shouldn’t be a long-time solution to building credit. Opt for a debit card for these goods: you can still enjoy the convenience, but without the accompanying interest rates. Because credit cards can also cost businesses money, retailers and small business owners may add surcharges to your purchase.
Credit Mistake #5: Acting as Cosigner
At some point in your life, you may be asked to cosign a loan that you do not need. This is commonly asked of parents by their children to help them buy things like cars or pay for student loans. Though you may want to help, be aware that cosigning a loan in your name could also be signing your way into a great deal of debt. If your name is on the loan—even as a secondary person—you are legally responsible for paying that money back. While the cosigning process itself shouldn’t negatively affect your score, if you are the party that is more financially well off, it’s likely you will be the one the bank goes after in the event the loan becomes delinquent.
Part of building great credit is remaining wary of the factors that can negatively affect your score. By avoiding these mistakes and carefully managing your spending you can take steps towards overcoming a low score or credit card debt.