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Five Common Credit Mistakes You Don't Realize You're Making

Written by Equifax Experts on August 5, 2014 in Credit  |   12 comments

Using credit can be a great way to establish a history of creditworthiness, but it can get you into trouble if not used responsibly. These five common mistakes are easy for even the smartest borrowers to make.

five-common-credit-mistakes-you-dont-realize-youre-makingOne great way for you to get the best financing terms and save money in the form of lower interest rates is to build a history of creditworthiness by applying for credit and repaying debt. Just be careful not to get in over your head when it comes to your credit accounts.

Credit mistakes can be easy for even the smartest people to make. Often, they’re so easy that borrowers don’t realize there is a problem until the amount of debt they carry becomes overwhelming.

When you look at consumer borrowing on a national scale, the issue is a lot more obvious. Total debt has gone up for three consecutive quarters, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit, released in May 2014. That hasn’t happened since 2008, during the Great Recession.

Steering clear of key credit pitfalls could put you in a better position to reach your financial goals. Here are five of the most common bad habits that borrowers should avoid:

1. Having too many credit cards.

Credit card offers can be very tempting. One might promise rewards at your favorite store, while another might offer pre-approval for a substantial line of credit. Unfortunately, keeping a lot of plastic in your wallet could cost you in more ways than one.

Applying for multiple credit accounts in a short period of time can have a negative impact on your credit score. This is because new accounts shorten your average account age—something you can’t afford to have happen if you’re trying to prove that you have a long, positive credit history.

Maxing out multiple cards could have even worse effects on your credit score and could cost you thousands of dollars in interest. Having one or two credit cards for emergencies can be a good credit practice, but be sure there aren’t too many carrots dangling in front of you.

2. Making minimum payments.

You may wonder why you should give up more than the required amount of your hard-earned paycheck each month when you can just make minimum payments. The fact is, the small amount of cash you keep on hand could pale in comparison to the amount you’ll spend in interest if you carry a balance on your credit cards.

You can see exactly how much more you’ll end up spending over time by looking at your credit card statement or using Bankrate.com’s minimum payment calculator.

Make a plan to pay down any debt as soon as you can. Some borrowers choose to start by paying the minimum plus the interest owed. Others choose to make minimum payments on debts with low interest rates and pay as much as possible toward accounts with higher interest rates.

(Read more: What Information Is on My Credit Report?)

3. Taking on credit that will take you too long to repay.

It is sometimes possible to lower your monthly debt payments by agreeing to a longer repayment period. This could increase your short-term cash, but it will do so at a very high price. The longer you take to pay back what you owe, the more you’ll pay in interest over time.

Stop to figure out exactly how much those lower monthly payments will cost you in interest before you apply for a new line of credit or consolidate your loans. If you have the option to pay off debts sooner to save money, you should.

4. Misunderstanding how introductory interest rates work.

Introductory credit card interest rates can be so low that they’re hard to pass up. Some even offer 0 percent financing for a limited time so you can make initial purchases sans interest or transfer the balance from one card onto a new one. Unfortunately, these deals don’t last very long—sometimes only six months—and you could get stuck paying much more than you expected.

Be sure to understand how much your interest rate would increase after an introductory period before you apply. If you aren’t able to pay the entire balance in time, these offers can be bad news for your credit.

5. Carrying high balances.

Most experts recommend keeping your debt-to-credit ratio—the amount of credit you’re using compared to your amount of available credit—below 30 percent. Any more than that and your debt can quickly spiral out of control.

12 comments

  1. Debra M says:

    So I purchased a new car, and the dealership secured the loan for me. There were over 10 inquiries from different financial institutes. I know that inquires impact my credit score, why did each inquire, instead of faxing the original from the dealership?
    By the time each looked, they all said I had to many inquiries. Dah!!!!
    Frustrated, my score was not all that great to begin with, now it’s worse!!!!!!!!!’

  2. t b blocker says:

    What about when your reports says you don’t owe enough people basically?
    Then your denied for that reason.

  3. Alex L. says:

    Thank you for these helpful tips concerning credit accounts.
    Al

  4. Bren says:

    I have several visa cards with no balance. I was going to cancel a couple of them.. I was told this would reflect negatively on my credit score which is well above 700.. does anyone no if this is true?

    • Colby says:

      If they don’t have an annual fee, don’t cancel those cards! If they have an annual fee, I can understand getting rid of them.
      If you cancel those cards then the average age of your credit history will be negatively affected. What I’ve done is lock my old cards in a safe and honestly, I never think about them.
      I only use one card with the (lowest interest rate) as my “emergency card.” When I have used the emergency card, I always pay it off quickly. It’s a method that’s taken me from a credit score in the mid-500s to my current score in the mid-800s.

  5. Gordon H. says:

    Will cancelling a seldom used credit card adversely affect my credit score?

  6. lydia says:

    The tips were useful and enlightening I have been paying more than the minimum on my two cards I would like to take out a used car but I am afraid I will be denied by my credit union for the loan even though I will be putting money down

  7. Robert N. says:

    How about checking your score everyday?

  8. Art C. says:

    I’ve always been told that once you bring a credit account down to zero or really close to it, that you should not “cancel” the account, but leave it at zero. If you agree with this line of action, when is the best time to rid yourself of the credit account?

  9. Evelyn says:

    I have not made any changes in my credit payments for at least 3 years now, yet my credit dropped recently. My credit in April 2014 was 753 but now dropped to 718 & no one is giving me any legitimate reason. I was told that my Mortgage company reported late payment but the record shows that this happened in January 2010 which affected my credit then, I am completely confused & frustrated.

  10. Jazzie says:

    Great information. I will take heed.


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