Most people do not know the importance of credit until it is too late and their credit is destroyed. Credit is such a difficult thing to build up, but it can be destroyed in an instant. This is why it is always good to exercise caution with your spending and credit lines.
If you have never learned about credit, however, you are certainly not aware of how your actions today can affect you tomorrow. You may not know anything is wrong until you go to buy a car or a home and find that you are rejected because of a low credit rating. Don’t let this happen to you. By avoiding these mistakes in your teens and early adulthood, you can establish a solid credit history as an adult.
Mistake #1: Not Making Payments on Time
Regardless of what type of credit you have–a car payment, a credit card or a mortgage–if you do not pay it on time, you are risking your credit in a most significant way. Late payments reflect badly on you and can drop your credit score up to 20 points with a single missed payment. In that instant that you lost 20 points, it will take you at least six months to build it back up–providing that you pay everything on time.
Mistakes happen, we forget to mail a check or simply forget the due date and overshoot by a day or two. It’s not a day or two that hurts you–it’s 30 days or more. If your payment was due yesterday, get online and make the payment today.
If it is financial difficulty that is the cause of missed payments, be smart about it. Millions of people are experiencing financial difficulty due to poor economic conditions. This fact alone has made creditors more understanding and willing to work with you. Pick up the phone and explain your situation. It will still count against you, but they are less likely to report it to the credit agencies if you show them that you are being proactive and presenting a plan to catch up.
Mistake #2: Applying for Every Credit Card under the Sun
It is an invigorating thing to apply for a credit card and be approved. Now, you can buy those gorgeous shoes or that new iPad that you have been fantasizing about. Then, inspiration hits you–why not see how many other credit cards you can be approved for, right? No! Don’t fall into this trap…it’s a deep trap–one that promises to keep you hostage for the next several years of your life.
All dramatics and kidding aside, it is a very real trap that people encounter. While you may be thrilled that hundreds or even thousands of dollars are at your fingertips, you have to remember that this money must all be paid back, with interest. Credit card interest rates are notoriously high, unless you have stellar credit, and even then you can expect interest rates to be a little off-putting.
If you must, stick to one credit card only and use it when it is absolutely necessary. Those gorgeous stilettos or that brand new flashy piece of technology can wait until you have saved up for it. That way you’ll appreciate it more and not cringe when your credit card statement arrives.
Mistake #3: Maxing Out Your Credit Cards
Regardless of the amount of credit you are approved for, refrain from spending it all in one place, or even two or three places for that matter. Running up your credit card hurts your debt-to-income ratio and also shows lenders that you are irresponsible. You want to use it sparingly, of course, because if it sits in your wallet, the lenders are not making any money at all and that will hurt your credit as well. Spend wisely and your lenders will reward you, by not only reporting favorably to the credit companies, but also by increasing your credit limit periodically.
It’s a tough act, balancing your credit so that you achieve harmony between your lenders, the credit agencies and your bank account. By learning responsible habits at a young age, you are certain to carry them through your adulthood and maintain credit that most people only wish they had.
Do you have any tips on how to keep people from destroying their credit? Tell us about your experience in the comments section.
