3 Credit Mistakes Everyone Makes | CreditRepairExpert.org

Avoid the most common credit mistakes to boost your credit score and get better rates

Bad credit means more than just higher interest rates. Most people don’t fully understand how their credit report can affect their life. Those minor little credit mistakes can close doors and cause more problems than you might realize.

For example, did you know that insurance companies are allowed to charge bad credit policyholders more? It’s called a credit-based insurance score.

Your credit can also affect whether you get approved to rent a home or the price you pay for your cell phone plan.

It makes protecting your credit so important but what about the credit mistakes you don’t even know you’re making? It’s not like good credit is taught in school and one mistake can mean being stuck with bad credit.

In fact, I found three financial blunders that nearly everyone makes.

 

1) Hooked on introductory rates without understanding payments after rates increase

Zero percent interest sounds pretty nice when you’re paying 18% on the rest of your credit cards, right?

The problem is that credit card companies know they’ve got you hooked once you open a new account. The cards with the highest rates and fees are usually the ones offering the juiciest incentives to attract new customers.

You spend the next six months racking up a hefty balance on your new card. Why not, 0% interest means you’re not paying anything extra on purchases. By the time six months passes, you’ve forgotten about how much the rate is going to increase and have no idea what payments will be on the debt. You also might not have the funding resources to pay off the debt as planned.

Even if you are able to keep up with the new (higher) monthly payments, the interest is keeping you from paying off the balance. Missing a payment could destroy your credit but even keeping a high balance will hurt your score and cost hundreds in interest.

There’s nothing wrong with taking advantage of introductory rates to transfer high-interest balances but pay your card balance off before your rate increases.

 

2) Making only minimum payments

Credit card companies aren’t going to tell you the danger of only making the minimum payment. I remember a time when they didn’t even have to include the word ‘minimum’, it’s now required to nudge people into paying balances faster.

Only requiring a small minimum payment is how the credit card companies make billions of dollars every year…billions out of cardholder pockets like yours.

Minimum payments are usually set between 1% to 3% of your balance. Making only the minimum payment means you’ll be paying off even smaller purchases for years and paying up to double the purchase price in interest.

Not only does paying the minimum cost thousands in interest but it also keeps your credit utilization ratio higher. This ratio is the amount of debt you owe relative to your total credit available and it’s a big factor in your credit score.

The higher your utilization ratio, the lower your credit score and the higher interest rate you’ll have to pay on any new loans.

List all your debt in order from highest rate to lowest. Try prioritizing debt payoff to cards with the highest interest rates first, paying extra each month to pay them off faster.

 

3) Thinking all debt is same

Not all debt is created equal, at least not in how it affects your credit score.

As much as 10% of your credit score is determined by the type of credit you have outstanding.

  • Non-revolving debt includes loans like mortgages and student loans. This debt usually has a fixed monthly payment and an interest rate. You borrow on it once and pay it off over a set period.
  • Revolving credit includes credit card debt and home equity lines of credit (HELOC). Payment on this debt increases as your balance grows and has no payoff date. Paying off some of the balance enables you to reborrow on the credit.

The problem with revolving credit, as it affects your credit score, is that it can get out of hand very quickly. You may not realize how high the payments will be when you’re borrowing and new creditors can’t be sure you won’t max out your previous credit lines after they’ve extended you a loan.

If you want to improve your credit score, focus on paying off revolving debt first. Non-revolving debt will still affect your credit score but not as badly as credit cards and other revolving debt.

These aren’t the only credit score mistakes that people make but they’re some of the most common and misunderstood. It can take years to improve your score so don’t ruin it with these financial blunders. Make sure you understand how much new credit will cost on a monthly basis and avoid high-interest debt on revolving credit.

Joseph Hogue

Joseph Hogue

Joseph Hogue is a financial blogger and investment analyst at PeerLoansOnline, a personal finance website focused on debt management and goals. A veteran and former economist, Joseph lives in Colombia with his wife and son.
Joseph Hogue

Latest posts by Joseph Hogue (see all)