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