Maintaining good credit can pay off in a tangible way when you’re ready to cash in on some major financial goals — and not just when you’re ready to buy a home. If you rent, healthy credit can boost you to the top of a landlord’s tenant application pile, especially if you’re searching apartments for rent in Boston, where competition can be fierce. (But it definitely won’t hurt you in any rental market!)
Your credit can be a useful component of your financial toolbox, but you need to understand how to leverage it properly. That starts with understanding both the obvious mistakes and the less apparent mishaps that can lead to bad credit.
Sneaky slip-up: ignoring your statements
While automating your finances is a smart money move as it ensures bills are paid on time, you still risk letting something slip through the cracks if you don’t check on the system from time to time.
Paying your balances and bills on time and in full is a good start, but you also need to take the time to review all monthly statements. If you don’t, you could miss mistakes, evidence of fraud, or other charges you should dispute. Missing these could cost you.
Obvious mistake: not paying your bills on time
Better late than never, right? That’s true when it comes to credit, but failing to pay your bills on time can ding your credit score and cost you even more money. You’ll likely be slapped with a late fee on top of the balance you owe. And multiple late payments will cause your score to drop, as payment history is the biggest factor in determining your score.
To avoid this bad credit mistake, establish a system for organizing and managing all your accounts. This could be as simple as a spreadsheet that tracks what accounts you use and when the due date for each is every month. You can also set up automatic payments on your bills so human error doesn’t trip you up.
Sneaky slip-up: using too much available credit
Another big factor that determines your credit score? Your credit utilization ratio. If you’ve never heard of this, you’re not alone. This ratio refers to the relationship between the amount of total credit you have and how much of that available credit you use.
For example, if you have a $5,000 limit on a credit card and you charge $3,500 each month, your utilization ratio is 70%. But to keep a good score, you should keep that number under 30% — even if you pay your balances on time and in full each month.
To solve this problem, plan to put less on your credit cards each month and use cash or debit instead. Or you might want to look into opening additional accounts to boost your available credit. (And yes, too many accounts can ding your credit too. If you’re concerned about this, ask your bank to raise your limit instead.)
Obvious mistake: charging more than you can afford to repay
It sounds obvious, but for many people, charging up more on credit than they can reasonably repay at the end of the month remains a problem. The best way to avoid this mistake is to track your finances carefully, create a budget you can stick to, and ask yourself why you’re racking up so many charges.
You can use tools such as ReadyForZero to help you manage debt if you’re struggling to get out of the red. But you should also devote some time to shifting your mindset. Ask yourself, are you really putting your money toward what you value? Are you prioritizing what’s important to you, or are you spending on status symbols and what you feel like you “should” buy?
Sneaky slip-up: failing to use your rewards
If you do use credit, make sure you get the most out of it. Choose a credit card that provides you cash back or rewards you can use toward something you value, such as travel. This is a great way to put money back in your pocket for purchases you would have made anyway.
Failing to use rewards can be a sneaky mistake, since you’re missing an opportunity to get more for your dollar. But misusing your rewards can be worse! It’s smart to use a rewards card to rack up points on everyday spending. But spending for the sake of trying to earn points? Don’t fall for that trap.
Some credit mistakes are obvious. You know you need to pay your bills on time, avoid charging or borrowing more than you can afford to repay, and open only lines of credit you need or will use. But it’s the sneaky slip-ups you need to watch out for to protect your credit and your overall financial well-being.
The best way to prevent mistakes? Ask questions, continue to educate yourself, and stay engaged with your personal finances.