5 Bad Credit Management Habits You Need to Break
Here's what you need to know about five common bad credit management habits you should either break or avoid in the first place.
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If you're not careful, bad credit management habits can be easy to pick up over time. Yet negative credit behaviors could have long-term implications for your financial life.
Bad credit management could lead to negative credit history, which can impact your FICO® Scores. As a result, you might have to pay more for financing products in the future—like loans and credit cards—or you could struggle to qualify at all.
However, if you learn about the behaviors that are negatively impacting your FICO® Score, it should be easier to avoid them. Here's what you need to know about five common bad credit management habits you should either break or avoid in the first place.
1. Late Payments
When it comes to your FICO® Scores, paying late is one of the worst credit management habits you can develop. Payment history accounts for 35% of your FICO Score. Therefore, when a late payment appears on your credit report, it has the potential to have a negative impact on your credit score. Additionally, multiple late payments and/or long overdue payments (e.g., 60 days, 90 days, etc.) could have a more significant, negative impact to your credit score.
Keep in mind that late payments also can stay on your credit reports for up to seven years.
2. High Credit Utilization Ratio
Another bad habit that's wise to avoid or break is keeping a high credit utilization ratio on your credit cards. The amount of debt you owe plays an important role in the calculation of your FICO® Score—worth 30% of your total score. Your credit utilization ratio (aka the relationship between your credit card balances and limits) is one of the key factors in the Amounts Owed category.
When your credit utilization ratio climbs too high, it means you're using a high percentage of available credit on your credit cards. In other words, you're getting close to maxing out your accounts. This behavior indicates risk and could negatively impact your FICO® Score.
3. Always Carrying a Credit Card Balance
There are many ways that a credit card could make your financial life easier. Credit cards can be convenient payment methods and may help protect you from fraudulent charges. Some cards might help you earn cash back or rewards.
But bad credit habits could hold you back. And one of the worst traps you can fall into is revolving a balance on your credit cards from one month to the next.
The habit of carrying a credit card balance from month to month can be risky for several reasons because:
- It could increase your credit utilization ratio, which may negatively impact your FICO® Score
- Owing balances on a larger number of accounts could indicate a higher risk of over-extension, which may negatively impact your FICO Score.
- You may be charged expensive interest fees by your credit card company.
- Carrying a balance may lead to higher credit card debt.
And don't fall for this common FICO® Score Myth: you do not need to carry a balance to improve your FICO® Scores!
4. Not Monitoring Your Credit
Having bad credit can be stressful. So, it may be tempting to ignore the problem and hope the situation will improve on its own over time. If you have good credit, you might believe that your credit is fine and there's no need to keep a close eye on the situation.
Yet in truth, failing to monitor your credit reports and your FICO® Score is a mistake. The impact your credit has on your financial life makes it too important to ignore.
When you review your credit information on a regular basis, you're in a better position to make sure that the details on your credit reports are accurate and error-free. If mistakes or fraud occurs, you can notify the appropriate credit bureaus that there's a problem. Monitoring your FICO® Scores and credit reports can also help you track your progress if you're working to rebuild your credit.
5. Opening Too Much New Credit at Once
Seeking too much new credit in a short period of time typically isn't wise—especially if you don't have much other credit history established. So, you probably don't want to apply for a bunch of credit cards at once or fill out a ton of personal loan applications back-to-back.
New credit accounts for 10% of your FICO® Score. When you apply for credit and the lender checks a copy of your credit report, generally a hard inquiry occurs. The impact of hard inquiries can vary, but for most people one hard inquiry takes less than five points away from their FICO Scores.
It's also important to understand that you can check your own credit anytime you like. Doing so generally is a soft credit inquiry and will not impact your FICO® Score.
Note, some types of credit inquiries allow for multiple inquiries in a short period of time and treat them as one inquiry, which allows for rates-shopping, or finding the best interest rate for a loan. Mortgage, auto loan, and student loan inquiries generally have this special type of rate-shopping treatment. Learn more about rate-shopping.
Bottom Line
Breaking bad credit management habits can be a challenge. But the potential rewards are worth the effort. Having a good FICO® Score could save you thousands of dollars and may unlock many other valuable benefits in the future.
Get your FICO® Score from FICO, for free. No credit card required.
Michelle Black, Founder of CreditWriter.com is a leading credit expert, financial writer, and speaker with nearly two decades of experience. Her work has been featured with major outlets such as Forbes, Reader's Digest, and U.S. News and World Report.