Abusing your credit can be incredibly damaging to your financial well-being. Mistakes, even small ones, could become black marks on your credit report for up to ten years. Carrying around this baggage is enough to make lenders cringe – and then deny you a mortgage, car loan, or new credit card.
You must focus on building good credit habits. Make these steps routine, and you’ll be on track to using credit responsibly.
Set Up Automatic Payments
Making automatic payments on your credit accounts and loans is extremely helpful for avoiding late fees and unnecessary interest charges. You won’t have to rely on memory to make payments, and you can ensure you’ll pay off the balance on credit cards on time, every time. For a mortgage or auto loan, you’ll decrease both your risk of delinquency and the possibility of foreclosure or repossession.
Set up automatic payments that coincide with your paycheck so that the money goes to these important bills before you spend on other things you don’t need.
Pay Off Credit Card Balances Each Month
Financing purchases with credit cards by running a balance month-to-month is like getting a bad deal on a traditional loan. Sure, credit card introductory interest rates can start at 0%, but these rates often balloon up to 10-30%. Interest will cost you a bundle until you pay your balance off, and your credit score and personal net worth will likely suffer, too.
If you’re going to use credit cards, you must be able to pay balances off in full each month. Otherwise they’re likely causing more harm than good.
Avoiding Credit Cards for Bridging Paychecks
You shouldn’t be using credit cards to finance purchases now and hoping to pay them off on future paydays. Spending this way is a dangerous game and a common story for ending up in debt.
Only spend money that’s in your bank account. And if the money isn’t available yet, wait until it is to make the purchase.
Keeping Tabs on Your Credit Report and Score
The best way to quantify how well you’re managing your credit it to take a look at your credit score. It’s what lenders look at before approving a loan or issuing a new credit card. It’s easy to obtain your score and many services offer advice for improving it, too.
Your credit report is an important companion to your credit score. Your credit report shows what accounts you’ve opened and closed in the last ten years or so. Plus, it’s your best defense for spotting fraudulent accounts that have been opened in your name.
You can also see if there is any damaging information in your report, like delinquent accounts, late payments, or unpaid balances. Occasionally there are mistakes in your credit report, too, which you should request to have by the fixed by the creditor if you spot them.
Stay on top of the information contained in your credit report and make sure it’s consistent with your records. Then analyze issues with your credit score and work on improving those particular areas.
Carry Only 1-2 Credit Cards At a Time
Lugging around a wallet full of credit cards is asking for trouble. You’ll have a tougher time tracking balances on multiple cards if they’re all in use at once. Plus, you’re putting yourself at greater risk for identity theft if your wallet is lost or stolen.
Make sure you’re not working with more accounts that you can manage at one time. Use a web app like Mint to keep track of your balances and due dates in one place.
Be Aware of Terms and Conditions
Not understanding how credit works will almost surely get you in trouble at some point. It’s important to understand the basics of fees, interest rates, and other terms associated with your loan or your credit card. It’s important to know details about when interest is charged, what happens when paying back your loan early, and how payments are applied to principal balances and interest.
For credit cards, look over and understand the terms sheet that comes when you open an account. While this information provided by your card issuer might seem complicated, it’s worth spending a few minutes to familiarize yourself with your card agreement.
For other forms of credit and loans, make sure you understand the terms of the agreement that you’re entering. If it’s too complicated for you to decipher yourself, have a lawyer or another professional assist you before you sign.
Don’t Get Blinded By Rewards
Many credit cards come with rewards with popular choices like cash back or free airline tickets. While these perks can be great, they’re only worthwhile if you’re using your credit cards responsibly. The 3% cash back you’re getting can easily be wiped out if you begin paying fees or interest because you’re being careless with your credit usage.
Make sure you’re still spending responsibly and not actually spending more just to chase rewards. Credit card spending can be more psychological than you realize so you’ll need to be as conscious as possible about every purchase you’re making.
When in doubt, stick to common sense to keep your credit in good shape. Your future self will be glad you did.