Using Credit Wisely: The DOs and DON’Ts
There are a ton of mixed messages out there about what your credit score means, if it matters, and what will “hurt your credit score”. It is hard to know what to believe - let alone to know what the right choices are. The hardest part about your credit score is that no one really knows the exact equation of how a score is calculated. All we can do is follow some basic guidelines to keep our scores going in the right direction.
Do: Keep Your Eyes on Your Credit
Use Annual Credit Report.com to regularly check your credit for free. You have access to your credit report from each of the three credit bureaus once a year so you can check your credit 3 times per year – and again, it’s free. Checking your own credit does not hurt your score and it is one of the best ways to spot identity theft right away.
Don’t: Apply for Too Much Credit
Every time you check out the cashier seems to ask if you would like save 20% and apply for a credit card. Saving 20% seems like a good idea, right? They are always quick to remind you that you can just turn around and pay it off and it doesn’t cost you anything. Although there is no monetary cost, applying for too much credit - and too frequently - can actually hurt your score. It shows a desperation for credit. So be VERY choosey about the places you become a card carrying member. If you are going to get a store credit card, look for ones that offer on-going savings, not just the one-time deal. Also, store cards tend to have a higher interest rate or APR (most of them are over 20%) so make sure that you don’t buy more than you can pay off in full when the bill comes.
Do: Pay with Plastic
Yes, I said it…USE YOUR CREDIT CARD. Here is why: showing that you can use credit responsibly improves your score, but that means you actually have to use it. Pick something you would normally buy in a month and use the card for it, then when the bill comes, pay it off in full. This allows you to show that you have credit and you know how to use it. (Read more about avoiding building up credit card balances in Malcolm’s blog, ‘5 Simple Ways to Avoid Credit Cards at Christmas’.)
Don’t: Carry Too Much
You may already know that maxing out a credit card is frowned upon in the credit world. The truth is, you don’t even want to come close. Ideally you want to keep your balance below 30% of your credit limit and never above 50% of your limit. It does seem odd that they would allow you credit you shouldn’t use, but the fact is they use it to determine healthy credit use. So the best way to keep your balance in check is to give yourself a healthy limit.
Do: Make Your Payments on Time
The reason you hear this one so much is because your payment history makes up the largest chunk of your credit score. Some payments are weighted heavier than others. For example, your mortgage payment carries more weight on your score than your credit card payment, but ALL missed payments will have an impact on your score.
Don’t: Make Unrealistic Payments
Who hasn’t decided to make a healthy change by starting to exercise, then totally overdo it and are unable to move for several days after? It doesn’t work and it’s painful. And the same goes for paying down your credit card balances. Getting your balance down or paid off is important, but make sure you have a plan in place that will get you to your goal in an effective, realistic way. Making larger credit card payments than you can afford will force you to use credit to cover your expenses and you will end up not getting anywhere on your debts.
If You Make a Mistake, Don’t Give Up
I have heard so many people say that they have learned to live without credit. The truth is that credit can be repaired if you are willing to put the time and effort into its recovery. Bad credit will follow you for 7 to 10 years from the last incident, but the farther you get from those mistakes, the better your score will get. As your good payment and credit use history starts to take over the bad, you will see an improvement - and you will be surprised how quickly you notice a change in the right direction.
Want more information? Check out the blog post: ‘Why is Credit Important’.
Our Financial Counselors are here to help you improve credit, pay off your debt, and manage your overall finances. Give us a call today at 888.577.2227 to schedule your financial check-up or a credit report review. What better time than now to make a change in the right direction for you and your family’s financial future? Take action TODAY.
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Author Ashley Hagelin is a Certified Financial Counselor with LSS Financial Counseling and she specializes in Reverse Mortgage Counseling.