Not understanding credit can cost a lot. And avoiding credit mistakes can keep money in your pocket, and credit available when you need it most.
These are the biggest credit mistakes, according to the Consumer Financial Protection Bureau, and how to avoid them.
1) Paying just the minimum monthly payment
The “minimum payment due” is almost always less than the “total balance due.” But the balance due is what you actually owe. If you pay only the minimum payment, you’ll be charged interest on the difference. Over time, that can be a lot of money.
Pay the balance due each month, or as much of it as you can. It’s one of the best ways to pay less in interest charges.
2) Paying late
Your credit score determines whether you can get a loan or open a credit card and how much it’ll cost you. Since your on-time payment record is 35% of your credit score, even paying late only once in awhile can wreck your score.
A great way to avoid paying late: setting up automatic payment. If auto payment isn’t available to you, set an electronic reminder on your smartphone, write it on your calendar—whatever it takes to make your brain do what it naturally wants to avoid.
If you can’t avoid paying late, call the lender. You can often work out an arrangement that won’t get reported to the credit agencies.
3) Taking the first offer
For many of us, shopping for a credit card or a loan is like any kind of shopping. We don’t like it, so we take the first offer.
But there’s almost always a better offer out there, if you’re willing to shop around.
The upside? Even a small improvement in credit terms, services, or perks like points can make a big difference in the money you save over time.
4) Not taking advantage of free credit reports
You get one free credit report every calendar year from each of the three credit reporting agencies. Request yours every year.
Your credit reports are used by lenders in deciding to lend you money—credit card companies, banks, mortgage brokers.
Credit reports sometimes have mistakes, which can hurt your score but which you can correct. You can request reports from all three agencies (Equifax, TransUnion, and Experian) online at www.annualcreditreport.com.
5) Check in before you borrow or buy on credit
Before you buy anything on credit, ask yourself:
- Do you need to buy this now? Can it wait until you have the cash?
- Can you afford the monthly payments?
- What are all your borrowing costs, including fees?
- What annual percentage rate (APR) will you be charged? Can you get a lower APR elsewhere?
- Will your borrowing costs cut into saving for important life goals?
- A little reflection can often keep you out of unnecessary debt.
6) Remaining “credit invisible”
If you don’t have a credit record that the credit reporting agencies can score, you may be “credit invisible.” And you may have trouble getting credit when you need it.
If you have never borrowed money or opened an applicable account, you are more likely credit invisible.
Take action now. Follow the steps above and request your free credit reports. If you don’t have a credit score from any of the three agencies, you can start building your credit history by opening a credit card account with a modest balance you can easily pay off.