needs Kasheesh
Failing to monitor your credit score regularly, missing payment deadlines, maxing out a credit card, and closing credit card accounts are just a few of the typical mistakes that are easily preventable.
Your credit score is a critical indicator of your financial well-being, so maintaining a strong credit history is essential. Part of this process involves understanding how your actions affect your credit profile and avoiding mistakes that can hinder your progress and harm your credit score for years.
As you familiarize yourself with the elements that influence your credit score, here are some frequent credit mistakes and strategies to avoid them.
1. Missing Bill Payments
Overview: Payment history is the most significant factor in your FICO Score (determining about 35% of your score), meaning a single missed payment of 30 days or more can severely damage your credit health. Additionally, late payments typically stay on your credit reports for seven years.
Details: The impact of missed payments can be profound, as they demonstrate to lenders that you may be a risky borrower. This can lead to higher interest rates on loans and difficulty getting approved for new credit. Consistent late payments can compound these effects, significantly lowering your credit score over time.
Solution: To ensure timely payments, request reminders from your lenders or set up autopay through your bank or lender. This will automate the payment process, reducing the risk of forgetting due dates.
2. Only Making Minimum Payments
Overview: Paying only the minimum on your credit card may seem manageable for a while, but interest charges can strain your budget. As your balance grows, it increases your credit utilization rate, which could potentially hurt your credit.
Details: Only making minimum payments on credit cards is detrimental because it allows interest to accumulate, significantly increasing the total amount owed over time. This can lead to a cycle of debt that is difficult to break, as the growing interest charges consume a larger portion of each payment.
High credit card balances can also negatively affect your credit utilization ratio, which is the amount of credit you’re using compared to your total available credit. A high utilization rate can signal to lenders that you might be overextended financially, making them wary of lending to you.
Solution: Aim to pay down your credit card debt as fast as possible. Consider using debt repayment strategies like the avalanche method (paying off highest interest debt first) or snowball method (paying off smallest balances first). To keep your utilization rate low on all cards, split up large payments between multiple cards and pay off some debt on all credit cards that are maxed out or nearly maxed out.
3. Neglecting Your Credit Scores
Overview: Regularly monitoring your credit score helps you track your progress and identify potential issues before they cause significant damage. If you neglect regular checks, you might miss warning signs of larger problems.
Details: By keeping tabs on your credit health, you can identify issues on your credit report that might harm your score and address them promptly. These problems may include high balances, late payments, or unfamiliar accounts. Regular monitoring also helps you catch any fraudulent activities early, allowing you to take action before they wreak havoc on your credit profile. Some people think checking your own credit report will hurt your credit scores, but that's just a common debunked credit myth.
Solution: Use free credit monitoring services or regularly check your credit report through annualcreditreport.com. Set reminders to review your credit score and report quarterly or more frequently if you are actively working to improve it.
4. Applying for Multiple Credit Cards At Once
Overview: Each time you apply for credit, the lender performs a hard inquiry on your credit report. For mortgage and auto loans, however, multiple inquiries in a short period are often treated as one inquiry for scoring purposes.
Details: For credit cards, each application is considered separately, and multiple inquiries can significantly lower your credit score. These inquiries remain on your credit report for two years and can collectively have a substantial negative impact.
Solution: If you want multiple credit cards, space out your applications by at least six months. To avoid harming your credit scores, it's advisable to limit your credit card applications to no more than two per year. This spacing prevents multiple hard inquiries from accumulating, which can lower your credit score and signal financial instability to lenders.
Research cards and assess your approval chances before applying to minimize unnecessary inquiries. Use pre-qualification tools that don't affect your credit score to gauge your likelihood of approval. Always educate yourself on healthy habits to keep your credit score high.
5. Closing Credit Card Accounts
Overview: Closing a credit card account in good standing will leave its history on your reports for 10 years, but you lose its available credit immediately, which can raise your credit utilization rate and hurt your score.
Details: Your total available credit is the credit limit on all your credit cards combined. When you close a credit card, your total available credit decreases, which can increase your credit utilization ratio. This can negatively affect your credit score, as a high utilization rate suggests a higher risk to lenders.
Solution: Consider your reasons before closing a card. If you struggle with overspending or the card has an annual fee with insufficient value, the impact on your credit might be worthwhile. Otherwise, keep the card open, and before closing a card make sure to look into alternative options like downgrading your credit card to a no-fee card offered by the same lender.
6. Choosing Longer Auto Loan Terms
Overview: Long-term auto loans might lower your monthly payments, but they can lead to negative equity, where your car depreciates faster than you pay off the loan. If your car is totaled or you want to trade it in, you could owe more than it's worth, risking collections if you can't pay.
Details: Longer loan terms mean you pay more in interest over time, and the risk of being underwater on your loan increases. Negative equity can make it difficult to trade in or sell your car without incurring significant costs.
Solution: To manage higher monthly payments, consider putting down more money, forgoing add-ons, or buying a cheaper vehicle. Choose shorter loan terms to pay off your car faster and reduce overall interest costs. If you’re already in a position where you’re struggling to pay your car payments, you can use Kasheesh to split your auto loan payments between multiple cards.
7. Maxing Out Your Credit Limit
Overview: Your credit limit is the maximum amount you can spend on your card. Keeping your spending well below this limit is crucial, as your credit utilization ratio affects your credit score.
Details: High credit utilization indicates to lenders that you may be financially overextended, which can lower your credit score and impact your ability to secure new credit or favorable interest rates.
Solution: Experts suggest keeping utilization below 30%. For a $10,000 limit, aim to spend under $3,000 per billing cycle. If necessary, pay down balances multiple times within the billing cycle to maintain a low utilization rate. If you need to make a large purchase, split the cost between multiple cards to avoid maxing out a card and wrecking your credit scores.
8. Hiding Debt From Your Partner or Family
Overview: Many couples keep financial secrets, but discussing money is crucial, especially if expenses or debt are rising. Talking about spending, saving, and investing can prevent future issues.
Details: Financial transparency is crucial because it fosters trust and allows for collaborative financial planning, ensuring that all parties are aware of and can address potential issues together. Hiding debt from your partner or family can lead to serious conflicts and financial mismanagement, ultimately damaging relationships and creating greater financial instability. The truth about hidden debts tends to surface eventually, causing even more significant trust issues and financial turmoil. Instead, focus on creating joint financial goals and strategies to achieve them.
Solution: Schedule regular financial discussions with family members to align on spending, saving, and investing goals. In a step towards creating financial transparency, you could consider adding a family member as a co-signer or authorized user to help them build credit, but ensure they understand their responsibilities and the impact on your credit.
9. Using the Wrong Credit Cards
Overview: Different cards serve various financial goals. If you're using an outdated card, you might miss out on better rewards or benefits.
Details: Using the wrong credit card can result in missed rewards, higher interest rates, and insufficient benefits for your spending habits. Choosing a card that aligns with your lifestyle can maximize your rewards and minimize costs. On a similar note, understanding the difference between credit and debit cards and when to use which is equally important.
Solution: Choose cards that match your spending habits and financial goals. Identify your major spending categories and find cards that offer rewards in those areas. Regularly review your credit card options to ensure they still meet your needs.
10. Becoming Complacent
Overview: Effective money management requires regular account checks, proactive saving and debt repayment, and optimizing cash flow. Complacency can lead to missed negative trends and harmful credit habits.
Details: Complacency can result in overlooked financial problems, such as growing debt or missed opportunities for savings and investment. Regular financial reviews and adjustments are necessary to maintain financial health, and for someone with a high income it can be especially easy to fall into the trap of complacency, as you might not feel the need to worry about your finances. No matter your financial status, it's important to track your credit and financial habits.
Solution: Automate finances as much as possible to reduce the burden of management and avoid complacency. Schedule periodic financial reviews to assess your progress, research the best credit cards and investment options, and make necessary adjustments to your strategies.
Building Credit Takes Time
Achieving a desirable credit score is a long-term process, but there are steps you can take to increase your credit score faster. Regularly check your credit report, pay bills on time, keep card balances and credit utilization low, and avoid debt that strains your budget. Developing these habits quickly can make them easier to maintain, leading to better financing options, lower insurance rates, and more.
