Using Credit Wisely: The Do's & Don'ts
There are a ton of mixed messages out there about what your credit score means, whether or not it matters, and what will hurt it. It is hard to know what to believe, let alone to know how to make the right choices. The hardest part about your credit score is that no one really knows the exact equation for calculating the score. All you can do is follow some basic guidelines to keep your score going in the right direction.
Some Do’s & Don’ts for Using Credit Wisely
Do: Keep Your Eyes on your Credit
Use annualcreditreport.com to regularly check your credit for free. You will have access to your credit report from each of the three credit bureaus once a year so you can check your credit 3 times a year for free. Checking your own credit does not hurt your score and it is one of the best ways to spot identity theft right away. See an issue on your credit report? Make sure you tackle it right away. Consider contacting LSS for a credit report review.
Don’t: Apply for too Much Credit
Every time you check out the cashier seems to ask if you would like save 20% and apply for a credit card. Saving 20% seems like a good idea, right? They are always quick to remind you that you can just turn around and pay it off and it doesn’t cost you anything. Although there is no monetary cost, applying for too much credit, too frequently, can actually hurt your score. It shows a desperation for credit. So be VERY choosy about the places where you become a card-carrying member. If you are going to get a store credit card, then look for the ones that offer ongoing savings and not just the one-time deal. Also, store cards tend to have a higher interest rate or annual percentage rate (APR)-- most of them over 20% -- so make sure you don’t buy more than you can pay off in full when the bill comes.
Do: Pay with Plastic
Yes, I said it…USE YOUR CREDIT CARD. Here is why: showing that you can use credit responsibly improves your score, but this means you actually have to use your card. Pick something you would normally buy in a month and use the card for it, then pay it off in full when the bill comes. This allows you to show that you have credit and that you know how to use it.
Don’t: Carry too Much
You may already know that maxing out a credit card is frowned upon in the credit world. The truth is, you don’t even want to come close. Ideally, you want to keep your balance below 30% of your credit limit and never above 50%. It does seem odd that creditors would give you credit you shouldn’t use, but the fact is they use it to determine healthy credit use. So the best way to keep your balance in check is to give yourself a healthy limit.
Do: Make Your Payments on Time
The reason you hear this one so often is because your payment history makes up the largest chunk of your credit score. Some payments are weighted heavier than others. For example, your mortgage payment carries more weight on your score than your credit card payment, but all missed payments will have an impact on your score.
Don’t: Make Unrealistic Payments
Have you ever decided to make a healthy change by starting to exercise, gone totally overboard, and then found that you are unable to move for several days after? It doesn’t work--and the same goes for paying down your credit card balances. Getting your balance down or paid off is important but make sure you have a plan in place that will get you to your goal in an effective way. Making larger credit card payments than you can afford will force you to use credit to cover your other regular expenses, and you will end up spinning your wheels instead of getting anywhere on your debts.
Don’t: Give Up if You Make a Mistake
I have heard so many people say that their credit score is so damaged that they have learned to live without it. The truth is that credit can be repaired if you are willing to put the time and effort into its recovery. Bad credit will follow you for 7 to 10 years from the last incident, but the farther you get from those mistakes the better your score will get. As your good payment and credit use history starts to take over the bad, you will see an improvement and you will be surprised at how quickly you will see a change.
Written by Ashley Hagelin
This blog post is from the Author's perspective and doesn't speak for brightpeak financial. Contact brightpeak if you want to know more about brightpeak products, and keep in mind that they are not available in all states and there are some limitations (some exclusions and restrictions may apply).