Let’s first take a minute and learn about some basic credit terms that you will hear about often on your credit journey and in this article.
Credit is the history of a person’s borrowing and repayment. Your credit score is a number that helps lenders decide how likely you are to repay a loan. A credit report contains information about your credit accounts, including the status of these accounts, late payments, collections, and any other public records.
These simple terms will be very important to you on your credit journey. They are all very basic credit terms, but they bear mentioning. Now, for the mistakes that people make managing these terms.
Mistake 1 – Not Checking Your Credit Report
Ignorance is not always bliss when it comes to credit. You should know that your credit report is the most important document in your financial life. It has everything from your credit card balances to your current mortgage information. With all of this information in one space, it is not very hard to imagine that errors can be made.
Errors can and do happen on credit reports, which is why you need to check your credit report often. Once a year, you are entitled to pull a full credit report from every bureau at no charge to you. You should do this religiously and report any errors that you find.
For added protection, you should also sign up for a credit monitoring service. There are several free credit monitoring solutions online, although they do subject you to advertisements. In addition, most credit card companies now provide free credit monitoring as a service. Be sure to take advantage of a few of these services.
Mistake 2 – Not Paying Down Debt
Debt is something that many people have just taken as a way of life. Everyone has debt, right? Well, maybe not everyone, because debt is a huge burden on your credit score and your overall budget.
If you have thousands of dollars of credit card debt, you are wasting money every month on interest payments. In addition, you are likely making the minimum payment on our credit cards, meaning that there is no quick way out for you. What you need is a plan.
Debt consolidation loans are a way to pay off your debts and get out of debt faster. The loan will be used to pay off all of your other debts and you will only have to make one monthly payment. Debt consolidation makes paying your bills easier and will generally greatly reduce the interest that you pay over time.
Debt relief programs are another way to get out of debt. These programs can help you by either reducing the interest on your loans or by giving you a break on your monthly payments. Most debt relief programs work by negotiating with creditors, so your credit score might initially take a hit. If you go this route, make sure that you discuss in detail how the program works so that you are prepared.
Mistake 3 – Carrying A Balance On Multiple Cards
Carrying a large balance on multiple cards will reduce your credit score due to high credit utilization. Credit utilization is the amount of your available credit that you are using. For example, if you have 1000 dollars in available credit and are using 400 dollars of it, your utilization is at 40 percent.
The best option to handle this situation is to consolidate all of your cards onto one low APR card. You do this by taking advantage of a credit transfer offer.
Balance transfer cards offer interest as little as 0% APR for a set time period, usually 12-18 months. The cardholder can then transfer their high-interest debt to the balance transfer card and pay off the debt with the 0% APR.
If you are looking to make a balance transfer, there are a few things you need to consider first.
1) You will need good credit in order to qualify for a balance transfer card.
Although balance transfer cards may be available for lower credit levels, they usually have much higher interest, negating much of the benefit.
2) The introductory rate may not be available for all types of purchases.
Low interest cards may only apply the low interest rates for transfers or they may only give the rate to new purchases. Be sure to clarify the details of your card so that you are not surprised.
3) You may be charged an “annual fee”.
Many cards that offer great benefits like zero percent interest come with a catch in the form of an annual fee. Make sure that you factor that in to determine your true savings.
Mistake 4 – Closing Old Accounts
Once you pay off a credit card, you never want to close it, especially if it is an old account. This is because credit age is a factor in your overall credit score. By closing an old account, you essentially lower the age of your credit and the average age of credit. The result is a credit score that could nosedive.
Instead of closing old accounts, simply put the card into storage. Then, make one small charge every 6 months. This will keep the credit card company from closing your account due to inactivity.
For those of you trying to avoid an annual fee, call the credit card issuer and attempt to negotiate either the elimination or the reduction of your fee. If successful, keep in mind that this fee may appear again the next year, so you might have to negotiate again in 12 months.
