If you’re trying to rebuild your credit score, you know how hard it can be to keep up good financial habits – especially if you’ve had problems with debt and bad credit in the past.
But if you want to qualify for good rates on auto loans, mortgages, and other loans, you’ll need a reasonably good credit score. Wondering what habits you should kick in order to boost your credit? Here are 6 bad habits that you should always avoid when you’re trying to rebuild your credit score.
1. Making Minimum Payments And Carrying A Balance From Month-To-Month
Carrying a balance month-to-month is horrible for your finances. If you only make minimum payments on your credit cards, the remaining balance will gain interest – usually at a rate of 12-25% APR.
This is what leads most people to get into credit card debt, in the first place. As the interest on your account grows and compounds, your total balance grows exponentially – and gets harder to pay off.
Never carry a balance on your credit cards. Even doing so for just a month or two can cost you hundreds of dollars, which can seriously affect your budget. Making a minimum payment is better than missing a payment – but not by much.
2. Putting Large Items On Your Cards And Not Paying Them Off Immediately
If you have the money to pay for an item in cash, it’s fine to use a credit card, as long as you pay it off immediately. But if you pay for expensive items using a credit card and don’t pay them off right away, your credit score could fall, because of a high debt utilization.
Debt utilization measures your total usage of your revolving credit accounts. For example, if you have 3 credit cards with a combined credit line of $15,000, and a balance of $3,000 spread across those cards, your utilization would be 20%. To build your credit, you’ll want to keep your debt utilization ratio under 30%.
If you put multiple large purchases on a credit card and don’t pay them off right away, your utilization will increase, and your credit score will drop.
3. Using Credit Cards With High Annual Fees
As a rule, you shouldn’t be using any credit cards that have an annual fee while you’re trying to rebuild your credit. Some credit cards can have an annual fee of $95, and high-end travel and rewards cards often can cost up to $500/year.
If you have credit cards with annual fees, you can usually switch them to a different card by contacting the cardholder and requesting the change. You can also cancel the account, but this may impact your credit score negatively.
4. Using Too Many Different Credit Cards
Try to limit yourself to using just one or two credit cards while rebuilding your credit. This makes it easier to track your spending habits, and make sure that you’re not living beyond your means. It also simplifies the process of paying down each individual card, reducing the amount of time you have to spend managing your personal finances.
5. Missing Payments
This is the biggest thing you should avoid when rebuilding your credit. NEVER miss a payment. You’ll be charged a late fee, your entire balance will gain interest, and your APR could skyrocket to 29.99% or higher. Not only that, your credit score will likely drop.
Make sure you don’t overspend. Do your best to pay your balance in full each month – and pay the minimum balance only when you have no other choice.
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