Borrowers tend to use credit as a way to access large purchases before they can afford to make those purchases in cash. It can be a good way to buy things such as a house or an affordable car. You typically build up your credit history over time to make these purchases. Still, unfortunately, many make credit mistakes that harm their overall credit profile and monthly finances.
Here are some of the most popular bad credit habits that many people have and how to break each one:
Using Too Much of Your Credit Line
Credit utilization, or the amount of your credit line you’re currently borrowing, is one of the most critical factors in calculating your credit score. Using too much of your total available credit across your accounts or for one credit line, in particular, can hurt your credit score and make it more challenging to repay the amount you owe as the total cost increases.
You can break this common bad credit habit by using your credit accounts more efficiently. Don’t use more than half of any one credit account to make a purchase. If you do, paying it down within the first 30 days is essential. If you need to borrow more, you might be spending more than you can afford.
Making a Late Payment
Every time you make a late payment, it shows up on your credit score. Having a history of late payments will negatively impact your credit for quite some time, and it can be difficult to recover from to get your credit in a position to earn low rates on a mortgage or other credit accounts in the future.
This bad habit is easily broken by setting up automatic payments for your credit account. Sometimes, setting up automatic payments will even lower the overall interest you’re paying because credit companies want to ensure they will get paid on time. Once the automatic payment is set up, you must make sure you budget correctly to have the amount of money available during the right time of the month.
Only Paying the Minimum Amount Due
The best practice for servicing your credit card account is to pay it off as quickly as possible. If you only pay the minimum amount due, paying it off will take quite a while. In fact, your credit card statement should tell you how long it will take to pay it off by paying just the minimum, and you may be surprised at how many years and interest you’ll be paying for a simple purchase. Instead, the goal should be to pay off your credit card accounts as quickly as possible.
The best practice is to pay off your account in the same month you purchase to avoid paying any interest. If you cannot do that, you should pay as much extra as your budget allows each month to limit the amount of interest you end up paying. If not, before you know it, you could end up paying twice as much as the list price for that new bed.
Frequently Closing Credit Card Accounts
Many believe that closing a credit card account not being used is a smart move. After all, you won’t be tempted to use that credit card if you close the account, and you won’t buy things you don’t need or can’t afford. Many people open a credit account to buy a specific item and then close it after it is paid off. However, the length of time your credit accounts have been open is one of the factors in determining your overall credit score. So, your older credit card accounts, no matter how much you use them, are actually benefiting your credit.
You can fix this bad habit by simply keeping your credit accounts open. You’ll need to take each account case-by-case, but some companies will close your account if you’ve been inactive for a year or more. This means you may need to make small purchases on each one every few months and then immediately pay them off in order to keep the accounts open.
Transferring Balances to Avoid Paying Fees
Another mistake that people make quite frequently is transferring the balance of a credit card from one account to another. This is typically done because the marketing of credit cards tells you that you can do it with 0% APR. for the first six months or even a year. It sounds like a great deal because you can avoid making a payment this month, and you don’t have to pay interest for a period of time.
Unfortunately, these balance transfers typically come with fees that increase your overall account balance. If you already have a balance on the card, you’re compounding the amount you owe into a worse APR long-term. Many people are denied the credit limit to make the transfer if they do this too often, or their application just gets rejected. Instead of transferring your balance, find a way to pay it off faster by creating a monthly budget.
Not Monitoring Your Credit
Another mistake a lot of people make is not monitoring their credit regularly. Suppose your personal information is stolen from your wallet or through an online service; someone could open up a credit card or other account using your information. More often than not, you’ll be responsible for whatever is purchased on the credit account in this situation.
You can monitor your credit score by getting your free credit report from each major bureaus each year, which everyone has a right to do. You can even space out your free reports throughout the year, getting one every four months or so, to constantly see all activity on your credit profile. Many credit card companies even offer a credit reporting feature that will notify you whenever a new account appears on your credit report.
Taking Out Cash Advances
Cash advances seem like a great deal because you can get access to cash today that you won’t have until payday. You’re actually borrowing money against nothing and paying a hefty price for it. Cash advances typically carry the highest interest rate of any credit card transaction, and they can put you in a worse financial position for the future.
Instead, consider creating a monthly budget that enables you to make all your payments and combine that with a debt plan to service your problem areas faster. This can help you get out of debt and free up more cash for you to use every month, eliminating the need to take a cash advance. If you can’t afford something, you shouldn’t be borrowing money and paying a hefty price to buy it.
Bottom Line
It’s never easy to break a bad habit, especially when it comes to money. Making bad financial decisions can impact you for a long time if you don’t actively take steps to correct that behavior. The good news is that it’s never too late to correct your mistakes and start creating strong financial habits that will put you in a better financial position moving forward. Fixing any of the habits you’ve started above will enable you to get on the right track and help you to save for the future.