These days, it is nearly impossible for ordinary, hard-working Americans to live without a credit card. Credit has a massive impact on whether or not you can buy a house, buy a car, enter into a rental agreement – it can even affect your job prospects!
Sometimes circumstances beyond our control can have us all relying too much on our credit cards. Unexpected expenses such as medical bills, vehicle or home repairs can cause people to reach for their credit cards. Sometimes life just gets in the way. A large majority of our clients are decent people who through sheer bad luck have found themselves in cycles of debt that spiral out of control and become impossible to break. An over-reliance on credit cards can be the catalyst to what feels like a never-ending circle of high interest repayments, late payments and negative balances. As such, credit card debt is a major factor when individuals are considering whether or not to file bankruptcy.
Whether you are reading this as a preventative measure, or you have filed bankruptcy in the past and want to learn more about the best tips for using your credit card in order to rebuild your credit score, this post will likely be very useful to you. Some of the tips will probably sound obvious, but when it comes to your finances, it is worth checking your list twice!
These are the most common mistakes made when using credit cards:
- Making late payments – this is one of the biggest contributors to plummeting credit scores. So much so in fact that Equifax, one of the US’ biggest credit agencies, determined that one late payment of 30 days could drop a credit score by at least 60 points, depending on a consumer’s current credit score. If a consumer misses a payment, contacting the creditor as soon as possible in order to establish a payment plan can seriously minimize the damage, and ensures you are maintaining a good relationship with credit card companies.
- Paying only the minimum payment – we all know that this is a sure-fire way to ensure escalated interest rates. Bank of America estimates that even paying an extra $10 a month could put consumers in a position to save hundreds of dollars.
- Having a balance over 30% of your credit limit – a good rule of thumb to abide by is to keep your credit card balances under 30% of the credit card limit. The truth is, the lower you keep your utilization rate (that is, balance-to-limit ratio) the better off you look to those credit bureaus. But as long as you are repaying the full balance of your credit card each month, every month, it doesn’t matter if your utilization rate jumps up occasionally. Use your credit card for purchases you know you can afford, and think of it more as a tool for you to use to build up your credit than a hard and fast way to spend.
- Closing your account – As tempting as it is to cut your ties with credit card companies and live as a cash-only citizen, having no credit is as detrimental as having bad credit. you are fortunate enough to be a millionaire, eventually you will need credit to qualify for a loan, or apply for a job. Starting over is hard, but the earlier you focus on rebuilding you credit score, the more grateful you will be. Similarly, you should think twice before closing any accounts, and if you do, they should be the newest accounts with the smallest line of balance and available credit. Essentially, you want to keep your credit utilization ratio as low as possible. For example, say you have 3 credit cards: Credit Card 1 has a balance of $750 with a $1,500 line of credit. Credit Card 2 has a balance of $900 with a $2,000 line of credit. Credit Card 3 has a $0 balance and a $1000 line of credit. That’s a total balance of $1,650 and $4,500 worth of credit- that’s a utilization rate of 36%. If, for instance, you closed Credit Card 3, that line of credit would disappear. Now you still have a balance of $1,650, but you only have $3,500 in overall credit, and your credit utilization jumps up to 47%. To the credit bureau, this makes you look like a risky borrower. So it is worth taking that extra time to really evaluate whether you will gain anything by closing a line of credit.
- Having too many accounts open at the same time – On the other hand, having too many lines of credit can also be detrimental to your credit profile. use your credit card just the right amount to prove that you are a responsible borrower. Having a line of credit open that you aren’t using is equal to having poor or no credit – and having too many credit cards makes it too easy to fall into bad habits of overspending. Two or three credit cards is plenty, as long as you are using them responsibly. Remember, the key is to show all of those lenders and bureaus that you aren’t a risky borrower, and that you deserve the very best interest rates and offers on the table.
- Failing to review your credit report – Say you are utilizing all of these tips, you pay your bills on time every month, you don’t overspend on your credit cards. Surely this means that you are a good borrower? Well, this is not always reflected in your credit score. It is worth pulling your credit report every 6 months to check for errors and make sure that every creditor is reporting properly on your credit report. When you pull your own credit, this counts as a ’soft inquiry,’ and won’t harm your overall credit profile. The bureaus are well aware you need to monitor your credit, and pulling your own report is considered responsible behavior. After all your hard work in building your credit, do you really want to see your score damaged by someone else’s mistake?
If you believe that there are inaccuracies listed on your credit report, call Stone Law Group at (602) 264-0500 today to schedule a consultation with an attorney. Our attorneys are experienced in battling creditors who improperly report to the credit bureaus, and we would love to be able to help you.