As consumers, we’ve never had more options when it comes to making a purchase than we do right now. Although not entirely mainstream yet, e-payments and digital wallets are only adding to our list of choices at the checkout line. But even with these new alternatives, Americans still reach first for our credit cards when making purchases.
With this continued reliance on plastic, it’s important to remember that a credit card is a tool — and, like any tool, there’s a right way and plenty of wrong ways to use them.
Even those of us who have used credit cards for decades could be making mistakes without knowing it. That’s because the credit card world is constantly evolving, and card issuers work hard to remain on the more profitable side of this transactional relationship. Even if you consider yourself a diligent user of plastic, you might be making mistakes you’re not aware of that could be affecting your credit report.
Here are some common but preventable mistakes many of us make with our credit cards, and how we can avoid these potentially costly blunders:
1. Making Unnecessary Purchases Just for the Reward Points
Credit cards with reward programs can really pay off — as long as they’re used wisely. The problem is many card issuers know that a certain number of us will spend more than we otherwise would have or will use a card with a higher APR, just to receive the points. It’s called incentivized use, and most of us have fallen for it. It may be obvious, but spending just to receive points or rewards can end up costing you a lot more than the rewards are worth.
Instead, keep close track of your cards’ rewards programs and plan accordingly to maximize the benefits. If you have a card that rewards you more than the average — some cash-back cards offer up to 6% back on certain purchases — use that card when you would already be making a purchase.
2. Making Only Minimum Payments
This is one of the biggest mistakes made by cardholders. Making only the minimum required payment increases the amount of time it takes to pay off your balance, and it also increases the amount of interest you pay over time. That’s because most of that minimum payment initially goes toward paying interest rather than the principal.
Given that the average credit card APR is 15.5% nationally, the fees can add up quickly. If you have a balance of $10,000 at that rate and make a minimum monthly payment of 4% of the balance, it would take more than 12 years to pay off and would cost $14,671 in interest.
3. Maxing Out Your Cards
Running up to the max of your credit limit can cost you in more ways than one. First, it can put a dent in your credit score, potentially causing the interest rates to increase on other cards. That’s because part of your FICO score is tied to credit utilization — credit used as a percentage of your overall available credit.
Also, fees and penalties can be assessed if you exceed your limit. Sometimes this can mean your bank charges a penalty rate, the highest interest rate they have. You should always avoid maxing out a credit card, and in fact, many experts suggest you shouldn’t exceed 30% of your credit limit for any given card.
4. Carrying a Balance to Improve Your Credit
It’s a widespread myth that you need to carry a balance to have a good FICO credit score. Part of the confusion around this is a misunderstanding between credit utilization and having an outstanding balance. There is a big difference between not using your card at all — and paying your card in full before the due date each month. As long as you use your card, your payment behavior will be reported to the credit bureaus, even if you have 0% utilization rate.
Carrying a balance from month to month is not necessary in order to build credit, and typically means only one thing — you’ll be paying interest charges. Given the importance of your payment history, one tip for anyone looking to improve their credit score is to open a credit card account and pay a single recurring monthly payment with it, such as a cellphone or Netflix bill, paying in full each month. This will improve utilization and your track record of on-time payments, and you won’t have to pay interest.
5. Making Late Payments
Paying your credit card bill late is probably the single biggest (and most common) mistake people make. Late payments can hurt you in a number of different ways.
First, your credit card company will charge you a fee for the late payment, which can be anywhere from $35 to $49 or more. Second, they can begin charging you a higher interest rate — even after one occurrence. Third, and perhaps most importantly, your credit score is likely to take a hit as it may show up on your credit report (depending on the issuer and how delinquent it is).
Avoid late payments on your credit card or on any loans or revolving credit accounts you have. Many credit card companies will let you choose or adjust your payment due date, so consider moving it to right after you get paid. You can also set up automatic payments to ensure you never forget a due date.
6. Holding Too Many Credit Cards
This one might not seem obvious, but having too many credit cards can cause headaches, as well. That’s because it’s often difficult to keep up with the rewards plan, APR, payment due date, and other details for a single card. When you begin carrying multiple cards, it can take a spreadsheet to keep track of everything. All of the problems we’ve listed here can be multiplied if you have too many cards in your wallet.
Now, that’s not to say there aren’t good reasons to have different cards for different purposes; just be sure you don’t have more than you can monitor and take advantage of. Card juggling is not for amateurs or the weak of heart — leave it to the professionals.
7. Using Your Credit Card as a Bank Account
Credit cards are easy to use; in fact, they can become a habit before too long. If your habit is to pull out the card to make a purchase without planning or thinking about it, that can lead to overspending and high debt levels before you know it. Also, using your card for cash advances or to spend more money than you have is a recipe for financial disaster.
Instead, consider each of your purchases carefully. Get into the habit of contemplating the use of a card when you pull it out of your wallet. Ask yourself where the money to pay for the purchase will come from and when it will be available. The longer it takes you to pay for something you’ve bought with a credit card, the more it will end up costing you.
Making Credit Cards Work for You, Instead of Against You
It’s hard to beat the convenience of a credit card when making purchases. They’re the preferred method of checking out when we’re shopping online, they’re accepted everywhere we go, and they’re easier to use than most electronic payment systems or digital wallets.
But don’t let this ease of use lull you into making mistakes that could cost you. A credit card can be a useful tool or it can be a ticket to financial disaster. It’s up to you.
Does Leasing a Car Help Your Credit? Learn More About it Here
A car lease gives you an opportunity to rent a car of your choice for an agreed period. Just like loan repayment, leasing a car requires you to pay monthly installments and is, therefore, a major contributor to your credit history.
So, does leasing a car help build your credit score? The short answer is that, if you make all your payments on time, an auto lease can improve your credit score. Here’s what you need to know about car leases and credit scores:
How Leasing a Car will Help you Build Your Credit Score
While it is not a requirement, most legit car lenders, and dealers, report your payment activity to the three major credit bureaus: Experian, Equifax, and Transunion.
Once your payments are reported, they become part of your payment history which influences 35% of your credit score.
Below, here are some highlights of what you can do to improve your score during the term of your car lease.
Late or defaulted payments reflect negatively on your credit history. This consequently lowers your credit score. To ensure that you can make your payments every month and do it on time, settle for an affordable monthly payment spread out over a longer period as opposed to higher payments over a shorter period.
- Check out your Credit Reports Regularly
To understand your current credit health, check your credit reports regularly. By so doing you will be keeping tabs on your debts and any errors that prospective lenders might see on your report.
More importantly, getting the report is the first step towards disputing errors on your lease terms. In such cases, you can raise a dispute with the company responsible for the inaccuracy in time to ensure that your score is not affected negatively.
Besides your car lease, having varying lines of credit reflects on your ability to manage multiple lines of credit. And although a credit mix accounts for only 10% of your score, it can provide a much-needed boost to your score.
With that in mind, it’s worth noting that a car lease is classified as an installment account. This makes a lease different from revolving accounts such as credit and gas station cards.
- Minimize Credit Card balances
Boosting your score with a car lease would not make sense if you hurt it in other ways. Credit card utilization ratio, or the percentage of the money you are using out of the credit you have available, accounts for 30% of your score.
It is calculated for each of your credit cards and also across all of them. Even as you go for a credit mix, it is paramount to keep your credit utilization ratio at 30% or below.
Keeping old lease accounts open will help your score by increasing the age of your credit, also known as credit history. This accounts for about 10% of your credit score.
Can you Lease a Car with Bad Credit?
Despite the fact that leasing companies mostly consider consumers with good credit, you could improve your odds of getting approved for a lease and get an opportunity to start rebuilding your score. Here’s how:
Make a Down Payment
Making a huge down payment not only shows your commitment to the leasing agreement but it also helps to reduce the overall amount of the lease. This also means lower monthly payments.
Consider a Cosigner
If you are not financially stable, consider asking someone with a positive credit history to co-sign the lease with you. Since both of you share responsibility for the account, it affects both of your credit reports. Good payment history will, therefore, help rebuild your score.
Improve your Debt to Income Ratio
Debt-to-income-ratio is the comparison of how much you owe against how much you earn. A high DTI ratio indicates that you have trouble meeting your debt obligations.
So, before you attempt to get a car lease with bad credit, reduce your DTI. Among the measures, you can employ include getting a second job or clearing credit card debts.
It is apparent that leasing a car can help build your credit score. However, this works hand in hand with your other lines of credit as they together make up your credit report. As such, put all your financial obligations into consideration before you sign a car lease to avoid causing more harm to your score.
Developing an Action Plan to Boost Your Credit
A quick action plan to boost your credit score
Once you have your credit report and your credit score, you will be able to tell where you stand and where many of your problems lie. If you have a poor score, try to see in your credit report what could be causing the problem:
- Do you have too much debt?
- Too many unpaid bills?
- Have you recently faced a major financial upset such as bankruptcy?
- Have you simply not had credit long enough to establish good credit?
- Have you defaulted on a loan, failed to pay taxes, or recently been reported to a collection agency?
The problems that contribute to your credit problems should dictate how you decide to boost your credit score. As you read through this ebook, highlight or jot down those tips that apply to you and from them develop a checklist of things you can do that would help your credit situation improve.
When you seek professional credit counseling or credit help, counselors will generally work with you to help you develop a personalized strategy that expressly addresses your credit problems and financial history. Now, with this ebook, you can develop a similar strategy on your own – in your own time and at your own cost.
When developing your action plan, know where most of your credit score is coming from:
1.Your credit history (accounts for more than a third of your credit score in some cases).
Whether or not you have been a good credit risk in the past is considered the best indicator of how you will react to debt in the future. For this reason, late payment, loan defaults, unpaid taxes, bankruptcies, and other unmet debt responsibilities will count against you the most. You can’t do much about your financial past now, but starting to pay your bills on time – starting today – can help boost your credit score in the future.
2.Your current debts (accounts for approximately a third of your credit score in some cases). If you have lots of current debt, it may indicate that you are stretching yourself financially thin and so will have trouble paying back debts in the future. If you have a lot of money owing right now – and especially if you have borrowed a great deal recently – this fact will bring down your credit score. You can boost your credit score by paying down your debts as far as you can.
3.How long you have had credit (accounts for up to 15% of your credit score in some cases). If you have not had credit accounts for very long, you may not have enough of a history to let lenders know whether you make a good credit risk. Not having had credit for a long time can affect your credit score. You can counter this by keeping your accounts open rather than closing them off as you pay them off.
4.The types of credit you have (accounts for about one-tenth of your credit score, in most cases). Lenders like to see a mix of financial responsibilities that you handle well. Having bills that you pay as well as one or two types of loans can actually improve your credit score. Having at least one credit card that you manage well can also help your credit score.
As you can see, it is possible to only estimate how much a specific area of your credit report affects your credit score. Nevertheless, keeping these five areas in mind and making sure that each is addressed in your personalized plan will go a long way in making sure that your personalized credit repair plan is comprehensive enough to boost your credit effectively.
Understanding the Factors that Affect Your Credit Score
What factors affect your credit score?
If you are going to improve your credit score, then logic has it that you must understand what your credit score is and how it works. Without this information, you won’t be able to very effectively improve your score because you won’t understand how the things you
do in daily life affect your score.
If you don’t understand how your credit works, you will also be at the mercy of any company that tries to tell you how you can improve your score – on their terms and at their price.
In general, your score is a number that lets lenders know how much of a credit risk you are. It’s a number, usually between 300 and 850, that lets lenders know how well you are paying off your debts and how much of a credit risk you are.
In general, the higher your score, the better credit risk you make and the more likely you are to be given credit at great rates. Scores in the low 600s and below will often give you trouble in finding credit, while scores of 720 and above will generally give you the best interest rates out there. However, scores are a lot like GPAs or SAT scores from college days – while they give others a quick snapshot of how you are doing, they are interpreted by people in different ways. Some lenders put more emphasis on scores than others.
Some lenders will work with you if you have the scores in the 600s, while others offer their best rates only to those creditors with very high scores indeed. Some lenders will look at your entire credit report while others will accept or reject your loan application based solely on your score.
The score is based on your credit report, which contains a history of your past debts and repayments. Credit bureaus use computers and mathematical calculations to arrive at a score from the information contained in your credit report.
Each credit bureau uses different methods to do this (which is why you will have different scores with different companies) but most credit bureaus use the FICO system. FICO is an acronym for the score calculating software offered by Fair Isaac Corporation company.
This is by far the most used software since the Fair Isaac Corporation developed the score model used by many in the financial industry and is still considered one of the leaders in the field.
In fact, scores are sometimes called FICO scores or FICO ratings, although it is important to understand that your score may be tabulated using different software.
One other thing you may want to understand about the software and mathematics that goes into your credit is the fact that the math used by the software is based on research and comparative mathematics. This is an important and simple concept that can help you understand how to boost your credit. In simple terms, what this means is that your credit is in a way calculated on the same principles as your insurance premiums.
Your insurance company likely asks you questions about your health, your lifestyle choices (such as whether you are a smoker) because these bits of information can tell the insurance company how much of a risk you are and how likely you are to make large claims later on. This is based on research.
Studies have shown, for example, that smokers tend to be more prone to serious illnesses and so require more medical attention. If you are a smoker, you may face higher insurance premiums because of this.
Similarly, credit bureaus and lenders often look at general patterns. Since people with too many debts tend not to have great rates of repayment, your credit may suffer if you have too many debts, for example. Understanding this can help you in two ways:
1) It will let you see that your credit is not a personal reflection of how “good” or “bad” you are with money. Rather, it is a reflection of how well lenders and companies think you will repay your bills – based on information gathered from studying other
2) It will let you see that if you want to improve your credit, you need to work on becoming the sort of debtor that studies have shown tends to repay their bills. You do not have to work hard to reinvent yourself financially and you do not have to start making much more money. You just need to be a reliable lender. This realization alone should help make credit repair far less stressful!
Credit reports are put together by credit bureaus, which use information from client companies. It works like this: credit bureaus have clients – such as credit card companies and utility companies, to name just two – who provide them with information.
Once a file is begun on you (i.e. once you open a bank account or have bills to pay) then information about you is stored on the record. If you are late paying a bill, the clients call the credit bureaus and note this. Any unpaid bills, overdue bills, or other problems with credit count as “dings” on your credit report and affect your score.
Information such as what type of debt you have, how much debt you have, how regularly you pay your bills on time, and your credit accounts are all information that is used to calculate your credit.
Your age, sex, and income do not count towards your credit score. The actual formula used by credit bureaus to calculate credit scores is a well-kept secret, but it is known that recent account activity, debts, length of credit, unpaid accounts, and types of credit are
among the things that count the most in tabulating credit from a credit report.
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