Biggest Money Mistakes People Make
A strong credit history is your lifeline to gaining affordable lending. It is of particular importance when making a major purchase such as a home. However, maintaining good credit requires making payments on time and avoid the biggest money mistakes people make.
With good credit, you have much less to worry about when it comes to your finances. Unfortunately, there are far more credit killers than credit enhancers. Here are the 10 biggest money mistakes people make:
Signing as a joint borrower on a loan or credit card could potentially help your credit. Unfortunately, if the payment responsibility belongs to the primary borrower, your credit could deteriorate if they fail to pay. You are responsible for the loan just as much as the primary borrower, regardless of any agreement you made.
Balance transfers are one of the biggest money mistakes people make. They can ruin your credit if not used wisely. Once you qualify, these transfers allow you to shift a credit card balance to a low or no-interest promotional card. It can be beneficial when your original account has a high interest rate, and your balance is carried each month.
The issue with balance transfers is that you may need to apply for and accept a new credit card. It automatically creates a new credit inquiry on your report. Balance transfers also equate to shifting your debt around, without necessarily paying it off. Unless you pay off your balance transfer within the promotional period (usually 12-21 months), it could harm your credit.
Going to court to absolve your debts can help you wipe the slate clean. However, it usually turns out to be one of the biggest money mistakes people make. Lenders view a recent bankruptcy as a blemish on your credit history. It will make you less likely to qualify for new credit even if you have no other debts. The bankruptcy will remain a black mark on your credit for at least seven years. Applying for a loan, credit card, or buying a new home will, therefore, become more complicated during this period.
The ability to get a cash advance from your credit card can be helpful when you are short on cash. However, cash advances eat into your credit limit. It inevitably increases your credit utilization and lowers your credit score. Furthermore, cash advances carry much higher rates, which makes you less likely to pay your credit card bill in full. The resulting missed payments will negatively impact your credit score for a long time.
To get a payday loan, you only need a recent pay stub. There is no requirement for a credit check or income verification. These loans have no immediate impact on your credit report and lenders rarely report to credit agencies. However, the ease of securing them can lead to a vicious cycle of lingering debt. Furthermore, these loans have high interest rates, which lower your ability to pay on time. When this happens, payday lenders sell off the loan to debt collection agencies, which will negatively impact your credit.
Credit utilization plays a significant role in the calculation of your credit score. How you use your credit accounts is of great interest to new lenders. Although proper use of credit facilities contributes positively to your credit score, overspending can negatively affect it. Maxing out your credit cards and then taking too long to pay will lower your credit score.
You can easily to get into financial difficulties when using revolving credit accounts. It is especially prevalent during the holidays when spending on gifts or travel can go overboard. Overspending damages your credit score and quickly shows up on your credit report.
Lenders look unfavorably upon creating several credit accounts in a short period. It indicates a potential cash flow problem in your finances. Lenders can still new credit inquiries into your credit report, but may not affect your score. Too much credit also gives you more leeway to overspend, which impacts your credit utilization percentage and tarnishes your credit. It also increases your chances of falling behind or failing to settle your debt obligations.
Closing Old Accounts
Calculating your credit score also depends on the number of credit accounts you have and the duration they remain open. A long credit history represents less risk to lenders, as long as all other credit calculation factors are favorable. It may be tempting to close that old retail store credit card you hardly use, but could impact your score. Keep your old credit accounts open as long as possible to boost your credit score.
If you are struggling with debt payments or errors on your report, you might consider using a credit counseling service. Credit counseling helps you manage your finances responsibly, and gives you information on how to gain a healthy score. While it may not impact your credit score initially, some results from your credit counseling might do so. If credit counseling is part of your debt management plan, the results may be included in your credit report.
Approach credit counseling with caution as promises to overhaul your credit profile may worsen your credit situation. Some counseling agencies may help you to manage your finances more responsibly. However, many of them are out to make a quick profit. Be wary of firms that claim to overhaul your credit profile in a matter of hours or days. Avoid agencies that promise to have negative information erased from your report siting obscure laws or recommending aggressive settlement tactics.
Read the fine print and ensure the credit agency is credible before agreeing to their services.
Tapping Into Assets
Credit agencies do not collect data on your checking, investment or retirement accounts, making it tempting to tap into them. Although this may help in the short-term, you might end up back into debt if you don’t control your spending. Think twice before you draw upon your assets, and focus instead on limiting your expenditures.
Other lenders tend to follow suit when one misstep gets reported to credit agencies. Credit card issuers will assess a penalty when a payment is overdue, increasing your borrowing costs. Ongoing credit checks by other lenders will have the same impact, which further damages your credit situation.
Therefore, to maintain a strong credit profile for current and future lenders, avoid these 10 biggest money mistakes people make.
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