We’re all guilty of having a bad habit or two — it’s human nature. But some habits are more harmful than others, like the ones that negatively impact your wallet and your financial stability. Case in point: bad credit habits.
Bad credit habits can cause a myriad of financial headaches. They can harm your credit score, put you in debt, and completely destabilize your financial future.
Luckily, becoming self-aware and identifying the problem is the first step to a healthier you. So, to help you understand what kind of habits you might be guilty of, here are 7 unhealthy credit habits to stay away from.
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7 Bad Credit Habits to Avoid
1. Only Paying the Minimum on Your Credit Card
The minimum payment on your credit card is usually just 1 – 2% of your balance, and there’s a reason for this. Credit card issuers are for-profit companies, so keeping minimum payments low encourages customers to pay interest.
Not only does paying just the minimum each month cost you in interest and inflate your balance, but it can also hurt your credit by raising your credit utilization. The general rule of thumb is to keep your credit utilization below 30% to prevent it from hurting your credit score.
Try to pay off your entire balance each month, or at least pay off as much as you can.
2. Using Your Credit Card Instead of Your Debit Card
Credit cards can be a great way to rack up rewards points, but when used excessively, it’s easy to fall into credit card debt. As long as you are charging what you can truly afford and paying off your credit card balances on time every month, then using your credit card for the occasional expense is fine. But a credit card should never be used as a replacement for a debit card.
Your debit card is a direct line to the funds you actually have, so for everyday purchases, you should opt for a debit card over a credit card to prevent overspending and accruing debt.
3. Opening and Closing Multiple Cards
Both opening and closing a line of credit can impact your credit score. When you close a credit card, you lower your total amount of available credit by that card’s credit limit — which could increase your overall credit utilization and hurt your credit. Also, keeping an account open helps improve your length of credit history, which is a factor in improving your credit score. If you no longer need a credit card, consider storing it away but not actually closing the account.
In turn, opening several credit cards isn’t very wise either. When you apply for a new line of credit, a hard inquiry is made on your credit report, which can lower your credit score in the short term. It’s much better to have a good record on a few cards than to open more cards just for the sake of it.
4. Missing Payments or Making Them Late
Life can get hectic at times, and it can be easy to forget about making payments, especially if you have multiple credit accounts.
However, missing a payment by just a day or two typically results in a late fee. While this won’t initially damage your credit, if you go more than 30 days without paying it, your credit can be negatively affected. It only gets worse when you forget about making a payment for 60 or 90 days.
According to Experian, a late payment can stay on your credit report for up to 7 years. You can avoid this entirely by setting up reminders or automatic payments to ensure that you never forget to pay your bills.
5. Taking Out a Credit Card Cash Advance
Cash advances may seem like a good way to get quick cash, but they can actually keep you in a cycle of debt and bad credit habits. Credit card cash advances are one of the most expensive types of credit card transactions — they typically come with hefty fees and high interest rates that kick in as soon as you take the money out.
You should never use credit cards as a source of cash. If you’ve fallen into this debt trap, it’s time to reevaluate your spending habits. Instead of relying on a cash advance, implement a plan to get out of credit card debt sooner rather than later.
6. Not Checking Your Credit Score and Credit Report
One of the major factors lenders consider when you apply to borrow money is your credit score. So, keeping an eye on your credit score should be part of your financial plan.
The good news is that there are several free credit monitoring services that can help you keep track of your score, including Credit Karma and Credit Sesame. These services can also show you which factors go into your score and how you’re doing with each, so you’ll know what to focus on inorder to improve it.
In addition to checking your score, you need to monitor your credit report. Monitoring both can help you catch any errors or fraudulent activity that might be hurting your score. You can get a free copy of each of your 3 credit reports each year at AnnualCreditReport.com. Take advantage of the opportunity and look for anything that’s out of order. If you find something, you can report it to the credit bureaus.
7. Making Balance Transfers to Avoid Payments
Moving outstanding debt on one credit card to another card is a balance transfer. This is typically done to move the amount you owe on a credit card to one with a significantly lower interest rate and better benefits. Many credit card companies will offer balance transfer credit cards with an introductory low interest rate to entice consumers. But if you are constantly relying on this method to avoid making payments on your credit card, you will lose in the end.
Balance transfers typically have fees that will increase your overall balance if you’re not making payments toward the transfer. And any purchases made on the card will need to be paid as well. Otherwise you could end up losing the credit card’s introductory annual percentage rate (APR) along with the grace period — and incurring surprise interest charges (and potential penalty APRs) on new purchases.
How to Comeback from Lax Credit Card Use
The best way to kick a bad habit is to replace it with a good one. That being said, let’s explore ways to replace your bad credit habits with good credit habits. Consider the following responsible ways to use your credit card, and start implementing them today.
- Create a budget and stick with it — A budget will give you a better idea of how much you earn and how much you can spend, so that you can better manage your finances and ideally have enough money to pay off your balances in full each month.
- Review your monthly credit card statements — Regularly checking your credit statements makes it easier to catch accidental or fraudulent charges that might otherwise go unnoticed.
- Set up automatic payments — If you have a problem remembering when your statement is due, set up a reminder on your phone or consider setting up an automatic payment.
- Build a positive payment history — Always make on-time payments. But if you do miss a payment, pay it as soon as possible and aim to at least pay the minimum amount due.
- Keep your credit utilization low — In addition to paying your bills on time and in full, try to keep credit card purchases to a minimum so you don’t go over your utilization ratio.
- Leave old credit card accounts open — Keeping an old account open will help lengthen your credit history, and increase your total available credit, which helps your credit utilization and score.
What mishaps or bad habits can lead to credit problems?
Some credit mishaps are out of your control and can cause serious damage to your credit score and creditworthiness as a borrower. Mistakes on your credit report, for example, can hurt your score. But if you check your credit regularly and monitor your report, you might be able to catch errors and fraudulent activity and report them to the credit bureaus — undoing the damage.
When it comes to credit habits, those are dependent on you and your financial maturity. Habits like applying for several credit cards in a short period of time, paying late or less than the minimum on your debts, and running up balances on your credit cards are all bad habits that are up to you to correct.