Building good credit is a years-long process, while destroying credit only takes a few bad decisions. With this in mind, it’s important for new credit users to avoid the many mistakes which lead to bad credit scores. Too often it seems inexperienced credit cardholders underestimate the ease through which bad credit can be acquired.
For these folks – the young ones especially – we thought it necessary to highlight the five best ways to avoid a bad credit score:
Maintain A Healthy Debt-To-Income Ratio
Credit score criteria includes something called the debt-to-income ratio. Basically it’s all your monthly debt payments added up and compared to your gross monthly income. If the former makes up more than 25% of the latter, then credit scores are sure to plummet.
Monitor your finances monthly to always know your debt-to-income ratio. That way you won’t let yourself accidentally fall into a ratio which looks unfavorable to creditors and lenders.
Adhere To Due Dates
Okay, we’ll start off by sharing a dirty little secret: one or two credit card payments paid a day or two late typically won’t result in a bad mark appearing on your credit report. But don’t risk it.
Companies that don’t immediately report your late payments to credit monitoring agencies can still do so at anytime, so never, ever neglect the due dates, even if your credit card company has been lenient in the past. Though somewhat hard to incur, one late payment mark on your credit report is enough to knock your score down several points.
Use Regularly, But Also Responsibly
This is probably the trickiest way to both build good credit and avoid destroying it at the same time. Creditors don’t want someone who hoards lines of credit and never uses them as much as they don’t want someone who maxes out their cards and never pays. They want customers who actively use their services responsibly. This is why your score can drop when you don’t use the credit you have. Online credit repair services typically tweet valuable tips and tricks for maintaining and managing responsible credit. Give them a look for some ideas on how to keep a good balance between credit use and paying off debt.
Appreciate The Interest Rate
The annual percentage rate of credit cards is often and unfortunately one of the last things new cardholders consider before accepting an offer for a card.
New credit card users are unlikely to see interest rates below 15% and are probably looking at something closer to 20%. So just think about that. If you spend $1500 with credit and take a year paying it off at $137/month, by the end of the year you’ll have paid around $145 in interest if your APR is 17%. That may not seem like much, but considering the average credit card debt in America is around $16,000 for a one-card household, it’s easy to see how credit card companies make their money and how credit card users can find themselves with a less than impressive credit score.
Increase Your Monthly Payment
The minimum payment imposed by credit card companies is designed to have you paying off your debt for as long as possible. The longer such a situation is allowed to continue the more likely it is you’ll continue to rack up debt without paying it off at the appropriate rate for a responsible debt-to-income ratio. The best way to combat this is to always opt for more than the minimum monthly payment. You’ll beat the interest rate and pay off the debt faster, which both contribute to keeping your credit score strong.
The unfortunate nature of new credit card use is that inexperience with money and spending breeds bad financial decision making. This is turn leads to bad credit, which initiates a vicious cycle of struggle which is difficult to get out of. Avoid it altogether by making sure you do what’s necessary to always maintain a good credit score.