Most people don’t set out to have bad credit. Poor credit scores tend to sneak up on you little by little because of credit management. People who have lousy credit scores all seem to make similar mistakes. Here are 7 bad habits they have in common:
1. Not Understanding the Importance of Credit
Like it or not, your credit scores have an enormous amount of influence over your life. Your credit scores can determine whether or not you get approved for a loan, utility accounts, insurance, and even a new job. Pretending that credit does not matter is naive and will not change the fact that failure to maintain good credit can cost you money and opportunities.
2. Not Monitoring Credit Reports
While you do have the right to expect the information contained on your credit reports to be accurate, it is ultimately up to you to monitor your reports to make sure all of the information is true. Mistakes on credit reports occur often. In fact, the Federal Trade Commission released a study in 2013 that suggests 21% of credit reports contain at least one error. That’s why it’s so important to get copies off all three of your credit reports and monitor them throughout the year. Remember, the credit bureaus have no obligation to correct errors unless you dispute the information.
3. Paying Bills Late
Even one late payment can have a negative impact on your credit scores. In fact, over 1/3 of your points come from the “Payment History” category of your credit reports. If you want to have great credit scores, then you have to make a commitment to make your payments on time, every time, and always.
4. Applying for Credit Too Often
Applying for new credit too often can take a toll on your credit scores. The impact is not huge, but roughly 10% of your credit score points come from the “Inquiry” category of your credit reports. Thankfully inquiries only have the potential to lower your credit scores for up to 12 months. Therefore, if you have developed this bad habit your scores can begin to recover little by little as old inquiries fall out of the 12-month window. But, you have to stop compounding the problem by excessively applying for credit.
5. Not Communicating with Creditors
Sticking your head in the sand and ignoring creditors is the worst way to deal with financial problems. When you have severe financial problems you should give your creditors a call right away to explain the issue and to see if they have any options to help you. With student loans, for example, you might be eligible for a temporary forbearance or deferment which could buy you the time to get back on your feet before you would be required to resume monthly payments on your debt. Some experts actually suggest that you should avoid your creditors and collectors as if that’s going to make your problems go away. That’s actually a better strategy to get yourself sued!
6. Carrying Credit Card Debt
Choosing (yes, it’s a choice) to run up more credit card debt than you can afford to pay off each month is an extremely bad habit that takes its toll on your credit scores as well as your wallet. Carrying credit card balances from month to month is virtually guaranteed to send your credit scores moving downward, even if you make every single monthly payment on time. Choose to use credit cards for their convenience and fraud protections, not as a supplement to your income or a way to impress your friends.
7. Failing to Budget and Save
Most credit problems stem from the failure to create a sound financial plan. As the saying goes, if you do not tell your money where to go you will be left wondering where it went. Create a proper budget and a plan to save back funds for unexpected expenses and you will be in much better shape to have great credit for the rest of your life.