Credit mistakes are something you must first recognize and then make the adjustments. Listed below are the 5 most common and you control them.
1) Not valuing your credit – Good credit is a valuable commodity in today’s world. Bad credit, including a bad credit record, late payments, etc., can create a negative financial profile that can surface when you have a legitimate need to borrow.
(Credit mistakes will create bad credit and cause you to get higher interest rates. This will cost you a lot more money and a longer time period to pay off. Read the article we did on the rule of 72 because this will show how money grows. With credit, it is working against you if you don’t understand and use your credit the best ways possible. On the other side – good credit allows lower interest rates and future buying and borrowing power)
2) Raising credit card limits – If you use credit cards, avoid raising your limit. An increased limit is merely an increased temptation to buy. If a company notifies you that they are raising your credit limit, take that as a warning signal. Chances are you’ve been using your credit card for more than emergencies. (As with everything there is another side to this one. If you only have 1 credit card and the limit is $500 (even if it is empty), you are still a risk to lenders and you will not get the best interest rates. Lenders are looking for people that use their credit, but use it wisely. Many people are getting large credit limits shut down because they are not using their credit. Why? If you are a lender, you are at risk when a large limit just sits open. It tells them, you don’t use your credit, so the only time you will probably use it is in the case of an emergency. That emergency may be a loss of a job. Then how will you pay them back. This makes them nervous. So always look at both sides of everything. A rule of thumb is to make sure the credit you use you can pay back in cash if you need too. With that said (I will and I am NOT telling you to do this), use credit to acquire anything that I believe will put me in a position to reap more rewards at the end. In other words, I will purchase a ticket to a seminar, buy DVD’s etc. for anything that will help me expand me as an individual and will earn me more than I would ever earn with my current thought process. It can be looked at as using other peoples money (which is what banks do). You can take credit and invest it into something that will earn you more than what it cost to borrow. You will hear many stories of wealthy people that got their start by using their credit cards to begin their business venture. Being scared to use credit is a prison also. Just be wise with it. If it is investing in you, then I would use it. You know the difference).
3) Not monitoring your credit history – Know where you stand. Lenders and prospective employers get a snapshot of your debt repayment history with your credit report and it is important for you to know what they are seeing. (You are allowed one free credit report a year. So if you haven’t gotten yours, grab it immediately. It is a normal occurrence to have information on your report that is not accurate or doesn’t belong to you. Make sure to get these things removed immediately. Don’t find out when you are trying to get a loan. It will hold up the process and possibly cause you to lose the loan)
4) Not monitoring your credit score – A good credit score can determine a lot of things today: Whether you will be approved for credit, the interest rate on your loans, the cost of your homeowner’s and auto insurance or whether you will be approved to rent a house or an apartment. (Many of you are probably aware that lenders, insurance companies, employers, etc. are using your credit score as a way to judge your character. Many believe a bad score says you are irresponsible. This is not always the case but that is the way they are using it. So a good score is looked at as a responsible person (which is not necessarily the case). Someone could be paying their debts for them because a person is “irresponsible”. The concerned party doesn’t want the irresponsible person’s score to get messed up (some parents do this for their kids or a responsible spouse). If the parents or spouse (because of a divorce or break-up) decides to stop paying, then the truth comes out. We all know things are not what they always seem to be. But knowing you are being judged by your scores are crucial. So do your part to keep it at the highest level possible). That means again – monitoring your reports.
5) Not knowing your interest rate and fees – Fees vary widely among cards. Always make sure you know what the interest rate and annual fees are before you accept the card. (This is crucial. There are cards that will give you a credit line (if you have no credit or bad credit) where they will give you a credit limit of $300. They will charge you a bunch of fees and you will owe them $250 by accepting the card. If you have to create this kind of debt, then the card is not worth it. You could get a prepaid card for that amount and have instant access to the same credit limit. In these cases, a lot of prepaid cards will give you the deposit back at the end of 1 year. They are just using it as collateral, if you should default on paying them back. For some this is a way to establish or repair credit. If they are not giving you the money back, then don’t use it. Just be aware that credit card companies earn their money on fees. Be careful when your payment is due. Companies change the due dates on purpose. They know people are habitual and will pay the same day each month. Their goal is to catch you sleeping and you will pay late. This allows them to charge you a late fee. Look at the fees for getting cash. If a company is charging you $10 to get money and you only take out $20, then you just paid 50% interest. Yes, this should be illegal, but it is not. So you must be aware)
Note: The words in brackets are my perspective on each mistake. The 5 most common credit mistakes was taken from the book: How money works: A common sense guide to Financial Success by Primerica
Below is more insight and places to check out to get more education on credit:
FICO has noted that below 20% is good, below 10% is better, and that people who have the highest credit scores average 7% credit utilization. (Example $1,000 credit limit – 20% would equate to stay at or below $200. 10% would equate to stay at or below $100. 7% would equate to stay at below $70)
To your FICO score, managing your credit responsibly means:
Pay your bills on time — Late payments and accounts referred to collections agencies can have a major impact on your FICO score.
Keep balances low on credit cards relative to their credit limits — High outstanding debt can affect your credit score.
Pay off debt rather than moving it around — A reliable way to improve your credit score is by paying down your credit card debt.
Don’t open new credit cards just to increase your available credit — This approach could backfire and actually lower your credit score.
Open new credit accounts only as needed — A cautious approach to taking on new credit will help you maintain a good score.
For more information and a great source to answer most credit questions – visit: http://www.myfico.com/CreditEducation/Questions/
For Free download books – visit: http://www.myfico.com/crediteducation/brochures.aspx
Disclaimer: I am not connected with these programs in any way and I am not responsible for what they disclose. I am just referencing this as a good source to get your questions, answered.