Credit score is a big component in personal finances. As society becomes more dependent on the use of credit cards, your credit score becomes more important than ever. Fifty-eight percent of future homebuyers say they are actively trying to improve their credit, according to a Wells Fargo study.
Make sure that as you swipe your credit card, pay your monthly bills, and open new lines of credit you’re avoiding these easy-to-make credit mistakes.
Closing Old Credit Card Accounts
You did it! You finally paid off that credit card balance that has been looming over your head for the past year, so what’s next? Your first inclination might be to cut up the card and close the account, but this can actually damage your score.
Not only will you have a smaller amount of available credit but all the history you built using that card (and paying it off) will vanish as well. It’s usually your best bet to keep that card open and refrain from making purchases with it.
Misunderstanding Introductory Interest Rates
Before jumping at the chance to open a new credit card with a 0% introductory APR, make sure you read the fine print. Though some introductory rates can last as long as 21 months, most are closer to a year; some as short as six months.
Be sure to know exactly when your promotional period expires – since the credit company is not required to remind you – and know what your APR will jump. The introductory teaser rate may not be worth it once you know the specifics.
Opening a New Line of Credit for the Wrong Reasons
We’ve all heard the sales pitch – “Would you like to open up a [insert retailer] card and save 25% on your purchase today?” Whether it’s a discount on your purchase of the day, a discount on purchases for life, rewards, airline miles, etc. you should be wary of opening a new line of credit unless you can immediately pay off the balance in cash.
Though a discount or reward may sound promising, you are destined to pay more in interest if you carry a balance on the new line of credit.
Making Only the Minimum Payment
Making your monthly minimum payment isn’t technically a mistake but in the spectrum of credit, you aren’t doing yourself any favors. Pay special attention to the amount of interest you are accruing each month in comparison to the minimum payment amount – you may notice that your minimum monthly payment is hardly budging your balance.
There are a couple ways to combat this common credit mistake:
- Make a pay-down plan. Use a pay-off calculator to determine what you will need to pay monthly in order to pay off your credit card.
- Pay the minimum plus interest. Some borrowers choose to pay down their debt by paying the minimum plus the interest owed or accrued.
- Pay highest interest rate cards first. If you have multiple cards that you carry balances on, start by making the largest payments possible on your highest interest accounts and continue making the minimum payments on your other lines of credit.
Holding High Balances
Most credit experts recommend keeping your debt ratio – the amount of your balances you are carrying in comparison to your total amount of available credit – below 30 percent. Carrying balances above the suggested percentage puts you at risk for debt spiraling out of control and inability to keep up with payments.
A good rule-of-thumb is to only make purchases on credit cards that you could pay for in cash.
Making Late Payments Once in Awhile
On-time payment history suggests that you are a reliable and credit-worthy borrower. Since payment history accounts for 35% of your FICO score, it's important to make all payments on time. Depending on your credit company or lender, a late payment could result in a substantial fee, an increase in your interest rate or a negative mark on your credit report.
According to FICO data, a 30-day delinquency can cause your score to drop as much as 90-110 points for someone with a 780 credit score who has never missed a payment previously.
Because payment history is the biggest component in determining credit score, consider automatic payments. If you know you are going to be late with a payment, contact your creditor to work out a payment plan. Many creditors will be flexible with a customer who has a good payment history.
Disregarding Monthly Statements
When your monthly statement comes via e-mail or snail mail each month, do you read the bill thoroughly or simply check the amount due? The latter is a big credit mistake. By fully reading through your bill you are not only more likely to make your payment on time but avoid credit card fraud or mistakes on your bill (yes, they can happen).
Make sure to double-check your monthly statements, so you can dispute any incorrect charges.
Taking Out Cash Advances
There might be an instance where you need cash in your hand. Though it may seem like a good idea to take out a cash advance from your credit card – it’s not. Not only do the majority of creditors charge a higher APR for advances, but some charge a transaction fee, as well.
Try to find a better solution or at least pay off the cash advance as soon as possible, because there isn’t a grace period for cash advances; you start accruing interest the day you withdraw the money.
Looking for more information on the home buying and financing process? Our Mortgage 101 Handbook is a great resource for first-time and repeat homebuyers.