Credit mistakes can take a heavy toll on credit scores and personal financial reputations, as well as leading to debt. Unfortunately many myths abound regarding the use of credit, which can lead to credit mistakes which can be avoided by knowing which practices will result in penalties and which mistakes will have a negative impact on credit scores.
The credit card reforms of 2010 have helped to clarify many points which credit users typically fell foul of by not acquainting themselves with the small print in the terms and conditions of signed agreements. Many of the worst practices which were typically imposed by credit card issuers have been stopped, which helps to prevent consumers inadvertently making expensive mistakes.
Legally credit card issuers can no longer charge more than 25% of available credit in fees; late payment charges have been capped; and lenders must now review increased interest rates at the end of a six month period. Whilst these amendments help consumers there are still plenty of mistakes which consumers can make which will have a negative bearing on finances or credit reputations. These are some of the key errors which should be avoided when using credit.
1) Allowing revolving debt to actually revolve. This typically applies to credit provided by payday loan lenders and credit card providers. Failing to pay off the full balance by the specified date can lead to increased debt as interest is levied on any outstanding balance. Payday loans which are not paid in full will often result in a further payday loan being needed to pay off the first one, and thus the slippery slope to debt begins. Making only minimum payments on credit cards is an expensive mistake which is now outlined on credit card statements.
2) Paying late. Late payments will incur late payment charges which in turn will accrue interest. The biggest mistake that credit card users make is failing to note at what point a penalty interest rate will be applied after late payments. Penalty rates tend to run at just under 30% and will not be reviewed for six months. This can be a very expensive mistake for anyone who typically carries a balance on their credit card. Late payments also impact negatively on credit scores.
3) Using balance transfer cards for purchases. Opening a balance transfer card is a good method of consolidating credit card debt onto a low interest rate. However, many consumers simply fail to appreciate that the low initial interest rate is only applied to the balance transferred, or only offered on purchases for a specified period of time.
Spending on balance transfer cards is an expensive mistake as payments made towards the balance are used to pay the balance with the lower interest rate first, unless the card provider employs a positive order of payments. Whilst this is now being implemented into U.K. law, the credit card amendments which took place in America failed to address this issue, so any new purchases made on a typical balance transfer card attract high interest rates that are paid off last. The easiest way to avoid this mistake is to cut up a new balance transfer card once the transfer is completed.
4) Applying for credit when credit scores are not high. This is an expensive mistake to make as a low credit score will result in high interest rates being applied and/or sub prime lenders being used. Before applying for any major credit line such as a mortgage or car loan it pays to check your credit score first and work to improve it if necessary. Although the median credit score is 720 this will not give access to the preferential interest rates which excellent scores attract, and could result in thousands of dollars being wasted on unnecessary interest payments.
5) Closing old credit cards. Credit card history counts towards your credit score and closing cards which represent the length of your credit history will have a detrimental impact. It is fine to close cards as long as they are newer ones, but the oldest should be used now and again to maintain the length of credit history.
6) Failure to check credit reports annually. As each of the three main credit bureaus provides one annual credit report free of charge, they should be checked to ascertain if any negative information is erroneously recorded. Reported errors can cost vital score points.
7) Overextending credit. Running up high balances, even if they are cleared in full each month, is a big mistake. Debt to credit ratio accounts for a significant percentage of credit scores and should be kept below 30%. Whilst it is wise to put all spending on credit cards to take advantage of cash back offers, doing so can result in too much available credit being utilized. The best way to avoid this mistake is to ask for a credit limit increase and maintain spending at no more than 30% of credit ratios.
There are many mistakes which can be avoided when using credit, but these are some of the worst ones, which will either result in debt or impact on credit scores. Knowing which mistakes to avoid will keep your credit score at an optimum level and eliminate the unnecessary risk of higher interest rates and charges being levied.