Are you hoping to build a solid financial future?
If so, building good credit is one of the most important things you can do for your finances.
Starting off on the right financial foot means making sure that your credit situation is as good as it can be. Good credit opens the door to all sorts of opportunities, from moving into the place you want to live to saving money on financial products and services.
Poor credit can mean financial setbacks. If you want to avoid seeing a financial setback, don’t make these four credit mistakes:
1. Not Getting a Loan Until You HAVE To
You might think that you’re doing your finances a favor by avoiding credit cards and other loans for as long as possible.
Unfortunately, this can be a rookie mistake that will cost you in the long run.
One of the easiest (and fastest) ways to build credit is to open a credit card account. Every month, your balance and payment information is sent to the credit reporting agencies. This information is a quick way to build a history.
Of course, it also means that you need to make sure that you make your payments on time and in full. Just because you have a credit card doesn’t mean that you have to rack up a bunch of debt.
Be careful and only make a few small purchases at a time. Be sure you can afford them, and that they fit your budget, so you can pay them off quickly. You’ll remain debt-free while still building your credit history and getting off to a good start.
2. Missing Payments
The biggest of all credit mistakes is missing payments. Your payment history is a major part of your credit score. In fact, it’s the biggest chunk of your credit score.
How much of an impact it has on your credit score depends on how often you miss payments, and how big of a payment it was. The more you miss payments, the bigger the impact on your score. Additionally, some payments, like missing a mortgage payment, can have an even bigger impact. Missing that mortgage payment is going to bust you down
Additionally, some payments, like missing a mortgage payment, can have an even bigger impact. Missing that mortgage payment is going to bust your credit score down further than being a little late making a credit card payment.
Whenever possible, do your best to make sure that you are making your credit payments on time and that you at least pay the minimum that you owe. This is an important of making progress in the long run. Try to avoid missing payments
3. Maxing Out Your Credit
Just because you have a credit limit doesn’t mean you should go all the way. In fact, this can be a big credit mistake.
Your credit utilization accounts for 30% of your credit score. So, if you max out your credit cards, it can have a negative impact on your score.
It’s also one of the big credit mistakes to borrow as much as lenders offer you. Often, you will be offered an amount that stretches your limits. You don’t want to stretch your limits. Instead, you want to stay well within them.
The best financial practice is to avoid carrying debt whenever possible. However, if you do have debt, try to keep it to 30% of your available limit.
When you limit the amount of debt you have, it helps your credit score, and it helps you maintain better financial habits so you don’t wind up in trouble down the road.
4. Using Too Much “Bad” Debt
The types of accounts you have matter when it comes to your credit score. Not only does this include revolving vs. installment accounts, but it also includes so-called “bad” debt like payday loans and department store credit cards.
A payday loan will actually drag on your score a little bit. Likewise, a department store credit card is going to have a different impact on your overall credit situation than a major bank card.
Pay attention to the types of debt you have. If you’re caught in a cycle of getting “bad credit” loans and credit accounts, that could be a sign that you need to reform your financial habits.
You can recover from credit mistakes, but it can take time. You’re better off avoiding the problems in the first place.