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Credit can help you make big purchases and achieve your financial goals, but too much credit and debt can be dangerous. The average U.S. household has nearly $8,000 in credit card debt, according to the Federal Reserve. Chances are if you’re in a lot of debt, you may also be guilty of some of bad credit habits.
But even those who aren’t swimming in debt may find themselves committing at least one bad habit, which may be hurting their credit score. Avoid these seven bad credit habits to keep your finances healthy.
1. Paying late
Paying late may be the cardinal sin of credit card ownership. Late payments literally cost you money. You are hit with a late fee, your interest rate may go up, and your credit score may take a hit, which will make it harder for you to get lower interest rates on future loans. Payment history accounts for the largest component (35 percent) of your credit score, so paying on time is vital.
2. Making only the minimum payment
If you’re making only the minimum payment on a credit card and not thinking about it until the next bill comes, you aren’t taking into account the interest that will be accruing over the life of your debt. The best practice is to only charge what you can afford to pay off every month, but if you’re stuck with some credit card debt, you need a plan to pay it off as quickly as possible. First, stop charging on an account where you carry a balance. Then, pay at least the minimum plus the amount of interest you’re being charged. That way, at least you won’t be charged interest on your interest. Finally, throw any extra money that you can spare into the account until it is paid off.
3. Maxing out a card
Maxing out a card may leave you struggling with a big bill, but it also messes up your debt-to-available-credit ratio, which is a factor in your credit score. The amount you owe accounts for 30 percent of your score, and so you want more available credit than debt.
4. Having too many cards
Most credit experts will recommend having no more than two credit cards. Why? It’s too easy to max out or miss a payment. With mortgage or rent, gas, electric, Internet or cable, and phone bills every month, do you really want to add five or six due dates for all your credit cards?
5. Not having an emergency fund
If you don’t have an emergency fund established, chances are you’re treating your credit card as the emergency fund. A solid emergency savings fund should cover your expenses for anywhere from three to six months—but the more the merrier. If you are suddenly slammed with a big dental bill, lose your job, or need to replace a broken refrigerator, you will have the money saved up to cover these bills. You have enough to worry about—you don’t need to worry about racking up debt too.
6. Letting other people use your credit cards
It might be your oldest friend, your reliable son, or even your own mother, but every single charge another person makes on your credit card eventually becomes part of your credit report. If these trustworthy folks don’t pay on time or rack up more debt than you can afford, your credit score will hurt, not theirs.
7. Canceling all your credit cards
For the same reason you shouldn’t max out your credit cards, you also shouldn’t close a bunch of credit cards. By closing your credit accounts, you are narrowing the amount of credit you are issued and changing your debt-to-credit ratio. By eliminating a $5,000 credit line, you will take $5,000 of available and unused credit off your report.
Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.
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