July 5th, 2012
Three Bad Habits to Avoid When It Comes To Your Credit
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It’s hard to kick bad habits, whether it’s something simple like biting your nails, or something with larger implications, like impulse shopping.
No matter the bad habit, getting rid of it is a task in itself. If you consider the consequences of certain bad habits on your credit and financial life, it may motivate you to never give into their temptation. Here are just three bad habits that are easy to form, but hard to break.
It might be tempting in other areas of our life—taking out the trash, writing Thank-you notes—but procrastination should never be a part of our credit life.
Imagine this: You’re a few days late on a credit card payment. You have the money, but you just forgot that the due date was looming. No big deal, right? Wrong. Making even one late payment can be a very big deal when it comes to your credit score.
One of the most significant factors in your credit score is your payment history. Your percentage of on-time payments must remain high, or your score will be negatively impacted and stay that way until you’re reporting a steady, uninterrupted stream of on-time payments.
Paying your bills on time tells lenders who look at your credit that you’re reliable and will pay back your debts. In short, it makes you more creditworthy.
How to avoid it: For your installment loans, bills that remain the same from month to month like student loans, set up automatic payments to be withdrawn well before the due date each month. That way, if something goes wrong with the electronic payment, you’ll have a few days to straighten it out before your debt is due. For revolving credit, such as credit cards, set up a mobile or email alert to remind you that your due date is coming up. Set it up for a few days in advance so you’ll be prepared to pay.
It’s never a good idea to max-out your credit cards. Not only will it leave you with high debts you probably won’t be able to pay off in all at once, but it will also cause your open credit utilization to skyrocket.
Your open credit utilization is a percentage representing how much credit you use compared to how much you have, or your credit limits. Your credit utilization is also a huge factor in your credit score. Keeping it under 30% is recommended so that lenders can see that you use credit responsibly, but don’t pose a high credit risk.
How to avoid it: Know your magic number. If you have $3,000 available to you in credit limits, know that you should only ever carry a balance of $1,000, tops. If you only have $1,500 in available credit, never go over that $500, or 30%, mark. Additionally, you should also be able to pay your balances off in full each month.
Your credit score is a three-digit representation of the information on your credit report. Basically, it tells you, and lenders, about your credit health. But if you don’t know your credit score, how can you know what you’re doing to impact it, both positively and negatively?
How to avoid it: Monitor your credit score on Credit Karma. If you see any strange fluctuations in your score or details on your credit report card that you can’t explain, pull all three of your credit reports at annualcreditreport.com and go through them, detail by detail. If you find what you suspect is an error on any of your reports, contact the reporting bureau to investigate the discrepancy.
Bottom Line: Why should you break—or completely avoid—these bad credit habits? In the long run, your credit will thank you. And your credit score will be in better shape when you go to apply for a mortgage, credit card, or auto loan. Not convinced it’ll make a difference? Check out Credit Karma’s Credit Simulator to find out how certain bad habits, like increasing your credit card balances or missing a payment, could affect your credit score.