Top Ten Credit Mistakes - Part 1
March 19th 2009 02:04
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In these tough financial times, it’s important to stretch your dollars as far as possible. But one of the ways too many consumers sabotage their efforts at living on a budget is by misusing credit or making mistakes with credit cards that cost them money unnecessarily. By being aware of these potential pitfalls, you can either avoid them altogether or, if you’ve already made some of these mistakes, maybe you can take steps to minimize their impact on your finances.
Mistake #1: Too Many Credit Cards
With all the “prequalified” and “zero interest” offers flooding your mailbox, it’s easy to be tempted to send in those applications. After all, the credit card company has looked at your credit, right? If they sent you the application, you must be qualified for the card, right? Not necessarily. Especially during the days when real estate values were propelling many consumers’ net worth steadily upward, many credit card companies subscribed to the “spaghetti theory” of credit underwriting: they fling a bunch of credit applications against the wall, hoping most of them will stick. They figure they’ll make enough money in interest and fees off the ones that do stick to pay for the losses they might incur on the ones that don’t. Clearly, you can’t depend on the credit card companies to know how much credit you’re capable of paying for. Especially nowadays, when many people’s home values are actually falling, you probably don’t need to be trying to take care of more than one or two credit cards, and you need to keep your balances on those as low as possible. Too many consumers acquire too many cards, transfer high interest balances on a “zero interest” introductory offer, then, instead of cutting up the paid off card, they use it again and find themselves facing minimum monthly payments they can’t handle. Don’t make this mistake: keep one or two cards with small credit lines, use them only for emergencies, and keep them paid down to zero or, failing that, as low as possible.
Mistake #2: Using All Your Available Credit
Even if you’re making your monthly minimum payments on time, you shouldn’t use all your available credit. It lowers your credit score when lenders pull your credit report and see that you’re using 70%, 80%, or more of the credit you have available to you. That may not seem fair. After all, if you’ve qualified for the credit, you ought to be able to use it, right? Well… yes and no. Sure, you can use it all if you want, but you have to understand that lenders evaluate your future ability to handle credit in terms of how much credit you’re already using (among other things). To keep your credit score as high as possible, use as little of your available credit as possible, and keep those balances low.
Mistake #3: Using Credit Cards to Pay Bills
This is another item that often appears on the lists that tell you when you’re getting in credit card trouble. If you depend on credit cards to “balance” your monthly budget by paying bills with them, you’re just digging yourself deeper into the hole.
Stay Tuned for Part 2
Mistake #1: Too Many Credit Cards
With all the “prequalified” and “zero interest” offers flooding your mailbox, it’s easy to be tempted to send in those applications. After all, the credit card company has looked at your credit, right? If they sent you the application, you must be qualified for the card, right? Not necessarily. Especially during the days when real estate values were propelling many consumers’ net worth steadily upward, many credit card companies subscribed to the “spaghetti theory” of credit underwriting: they fling a bunch of credit applications against the wall, hoping most of them will stick. They figure they’ll make enough money in interest and fees off the ones that do stick to pay for the losses they might incur on the ones that don’t. Clearly, you can’t depend on the credit card companies to know how much credit you’re capable of paying for. Especially nowadays, when many people’s home values are actually falling, you probably don’t need to be trying to take care of more than one or two credit cards, and you need to keep your balances on those as low as possible. Too many consumers acquire too many cards, transfer high interest balances on a “zero interest” introductory offer, then, instead of cutting up the paid off card, they use it again and find themselves facing minimum monthly payments they can’t handle. Don’t make this mistake: keep one or two cards with small credit lines, use them only for emergencies, and keep them paid down to zero or, failing that, as low as possible.
Mistake #2: Using All Your Available Credit
Even if you’re making your monthly minimum payments on time, you shouldn’t use all your available credit. It lowers your credit score when lenders pull your credit report and see that you’re using 70%, 80%, or more of the credit you have available to you. That may not seem fair. After all, if you’ve qualified for the credit, you ought to be able to use it, right? Well… yes and no. Sure, you can use it all if you want, but you have to understand that lenders evaluate your future ability to handle credit in terms of how much credit you’re already using (among other things). To keep your credit score as high as possible, use as little of your available credit as possible, and keep those balances low.
Mistake #3: Using Credit Cards to Pay Bills
This is another item that often appears on the lists that tell you when you’re getting in credit card trouble. If you depend on credit cards to “balance” your monthly budget by paying bills with them, you’re just digging yourself deeper into the hole.
Stay Tuned for Part 2
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