Have you checked your credit score recently? If you haven’t, you definitely should. According to a study done and published on NFCC.org, only 1 out of 3 Americans reviewed their credit report and credit scores.
It is not that hard to check your score. You can get it free at sites such as CreditKarma.com and CreditSesame.com or from one of the three credit reporting bureaus – Experian, TransUnion, and Equifax.
Spoiler alert – this won’t be your true FICO score, which is the one used by virtually all lenders. However, it will be close enough for you to see how lenders will view you.
Why is your credit score so important? It’s because this little three-digit number is a distillation of all your financial past and present. Have you used credit sensibly in the past? Then you should have a decent score. On the other hand, if your credit history is less than stellar so will be your credit score.
If you’re looking to make a big purchase or even applying for a mortgage then you need to make this year the year to stop those bad credit habits and learn what you need to do to fix your credit.
Bad credit habit #1: Not monitoring your credit reports
The first habit to break is if you’re checking your credit score but not monitoring your credit reports. If you are using one of those credit scoring apps that offer credit alerts you can easily fall into the trap of thinking you’re truly aware of what’s going on with your credit. But this may not necessarily be the case.
You also need to monitor your credit reports. You have three of them because there are three credit reporting bureaus – TransUnion, Equifax, and Experian. All three of your reports will likely be different because of the different ways that the bureaus collect and report information. It’s important to get and review all three and pay attention to them even more than your score. You could believe that your credit score is okay but your reports could show inaccurate information or blemishes that you should take care of now and not later. You’re entitled to get your credit reports free once a year either from each of the credit bureaus on the site www.annualcreditreport.com.
If you’d like to know the key differences between the reports from the three credit-reporting bureaus, here’s a brief video that explains them.
Bad credit habit #2: Failing to understand how credit scoring works
Credit scoring is a very complicated thing and it would take an entirely new and very long article to totally explain it. However, there is one thing you may be doing that is negatively impacting your score. If you rack up large credit card balances every month but pay them off in full when you receive your bill, you won’t be piling up debt. However, you may not necessarily be helping your credit utilization ratio, which makes up 30% of your score. Your credit utilization ratio or debt to credit ratio is simply the amount of credit you’ve used divided by the total amount of credit you have available. For example, if you have $10,000 in credit available and currently have used only $3000 of it, your credit utilization would be 30%, which is very good.
However, your credit card companies report balances at various times throughout the month. If you are at the high end of your limit when your balances are reported you will have a higher ratio – despite the fact that you intend to pay off your bill when it’s due. So, if you are doing this that’s a habit you need to break. According to the data published on CreditCards.com, the average credit utilization rate in 2014 was 30%. That is a good sign and you need to stick to this limit if you want to maintain a good score.
Bad credit habit #3: Sharing your credit to help someone
Are you in the habit of co-signing friends’ or relatives’ loans? This is one habit you absolutely must break because it could be driving your credit score into the ground. This might seem like a simple and painless way to help a friend or family member in need. But what happens if they make late payments or simply default on the loan? Guess who would then be in the book? That’s right, you. Unless you’re financially prepared and able to take over the payments should things go awry, don’t cosign. Instead of doing this, find ways to help the family member or friend establish and repair their own credit instead of laying yours on the line.
Bad credit habit #4: Avoiding credit altogether
Are you staying away from credit entirely because you’re afraid you’ll get in over your head? There are many, many horror stories about people that found themselves drowning in debt or with financial responsibilities they couldn’t manage after taking on some credit. We understand that this can make it seem as if refusing to use credit altogether would be your best option. The problem is that having no credit can be just as much of a problem as having poor credit. So don’t avoid it altogether. Make a resolution to find ways to use credit responsibly and establish it for future purchases. You could do this by opening a credit card with a low balance and then use it for just a few purchases making sure to pay off the balance in full every month.
Bad credit habit #5: Not reading the fine print
If you’re in the habit of not carefully reading the fine print in your credit card agreements you could end up in a world of hurt. Before you establish a new line of credit make sure you understand the full ramifications of the debt you’re taking on before doing so. When you sign up for a new credit card you probably have the best intentions of paying off your balances in full every month and avoiding late payments at all costs. Then life happens. You forget a payment or you have a drop in income or a month where you spend more than you can totally pay off. These things happen to everyone. But it’s absolutely essential that you fully understand all the terms of the credit card or loan before signing that agreement. There will undoubtedly be late payment fees and there may be a stiff fee for going over the limit. Read the fine print carefully and you will at least know what to expect. And if you are late in making a payment expect that your credit score may take a hit. There’s an old saying about “not by biting off more than you can chew”. And this can be especially relevant when it comes to credit. Before you sign up for any line of credit ask yourself the question, “Am I taking on more credit than I can really afford.”
