Know How To Avoid These Credit Mistakes
We all make mistakes. Millennials are in the spotlight for theirs because they’re the first generation that’s constantly connected. You can buck the trend and avoid these credit mistakes, but first, you have to know what they are.
We have rounded up the most common mistakes, and the ones that will hurt your credit and finances the most so that you can avoid making some negative financial moves.
Avoiding Credit Altogether
You have heard the tales of woe before. The 18 year old that suddenly had a credit card and quickly maxed it out. Years later that same individual is tens of thousands of dollars in debt with no relief in sight. You don’t want to be that person, so you avoid credit cards and loans as much as possible.
Debt free is great, but it’s not going to build your credit. Being smart about your credit will put you in a better position to buy a car or house when the time comes. Don’t skip credit, just understand it and stay out of trouble.
Opening a Card because it has Sweet Rewards
There are a lot of rewards cards out there. Just pop into your favorite retailer, and you will likely be told that you can save 10% if you open a card with them. It sounds like a great deal, right? Unfortunately, opening that card can have more long-term consequences than just having another card with debt on it.
Just applying for the card will put a hard pull on your credit. One may not be a big deal, but multiple pulls in a short time can be a problem. Another open account can ultimately have some negative effects on your credit score as well. Skip the problems, and pass on the store card.
Skipping the Rewards Cards
Wait, didn’t we just say to pass on the rewards cards? Yes, but only on those that have pseudo-rewards (10% off your one-time purchase isn’t worthwhile). But there are still cards out there that have great rewards that you can capitalize on.
A lot depends on what your passions are. Do you like to travel? Do you want cash back? Are you a bargain hunter? Different cards will give you perks, and if you are using them appropriately, you’re not spending anything more than you would otherwise.
Not Knowing Your Credit Score
Your credit score is your ticket to great rates and better terms. Just how great? Consider this: if you have poor credit (between 500 and 600) you will pay about 10% interest for a loan on a new car; if you have excellent credit (between about 780 and 850) you will pay less than 3% interest for a loan on a new car. It’s not hard to see that an extra 7% interest is going to cut deep into your finances.
Fortunately, checking your credit score isn’t hard to do. I recommend using Credit Sesame because they will provide you with your score for free. When you do pull it, if it seems a lot worse than you expected, you should make sure that all of the accounts are actually accounts that you have opened. There are ways to dispute discrepancies, it just takes some time.
Not Paying Attention to Credit Limits
Suppose you get a credit card with a $5,000 spending limit. You can spend up to $5,000 and not have any worries, right? That’s not entirely true. $5,000 is the limit, but pushing that limit month after month is going to hurt you in the long run.
A portion of your credit score is determined by the percentage of your limit that you spend. The lower that percentage, the more responsible you are seen. Try to keep your spending from going over about 30% of your limits; so your $5,000 limit should really be viewed as a $1,500 limit. In the event that you do have higher charges, simply pay off a portion before the card cycles to bring it under the 30% target.
Paying High Interest Rates instead of Refinancing
There are times when you simply cannot avoid paying a higher interest rate. Student loans are often as high as 7% or 8%; you can’t exactly put them off until rates come down. Other times you have already gotten in over your head, and you’re stuck paying 20% or more on a credit card. There’s a way out.
Refinancing to a lower rate is often an option. This may be through the use of a 0% balance transfer card, through a debt consolidation loan, or renegotiating with the lender.
If your credit is bad, you might have to work with a credit repair company before you’re able to get the terms you want.
Buck the Trend; Don’t Make Credit Mistakes
Young people get a bad rap for not paying attention to finances. It happens to every generation. But you can buck that trend and make sure you don’t fall victim to credit mistakes. Pay attention to your spending, understand how credit works, and blow past your peers when it comes to finances.
