When it comes to credit, most people try to do everything they can to keep it in tip-top shape. However, life has a habit of getting in the way sometimes. You could experience a family emergency and forget to pay your credit card statement on time. Or, you might have a costly car repair that you can only pay for with a credit card.
Whether it’s bad luck or an accident, some mishaps affect your credit much more than others. For instance, being one day late on your credit card statement might result in a penalty fee, but it’s not something that will stop you from getting a mortgage. On the other hand, some minor mistakes can be catastrophic.
To help you avoid a bigger problem down the road, NerdWallet explains which seemingly small credit mistakes can lead to a mountain of trouble.
What Makes A Mishap A Bigger Problem?
Sometimes you can fix some mistakes relatively fast. For example, maxing out multiple credit cards can sink your credit health since it sends your credit utilization ratio (the amount of credit you’ve used against how much you have available) soaring.
This percentage is a significant factor in your credit score, and most lenders only approve applicants with a ratio lower than 30% or even 20%. However, if you pay off the balances, the adverse effects gradually fade as your credit card issuers continuously report to the three major credit bureaus.
According to John Ulzheimer, a credit expert, mishaps with the biggest long-term impact damage your credit standing. For instance, a delinquent payment could go to collections, then a repo company, and eventually bankruptcy. These all take a massive toll on your credit and linger on your record for many years.
Similarly, agreeing to cosign a loan that the original borrower fails to pay can also hurt your credit for years to come.
Common Mishaps That Can Damage Your Credit
Forgetting to pay your credit card bill for a few days might result in a late charge, but it won’t tank your credit score since card issuers don’t consider accounts as delinquent until 30 days past the due date.
If you have good to excellent credit, a 30-day-plus late payment can curb up to 100 points from your score — and stays on your report for seven years. The consequences only become worse for bills that are later than 60 or 90 days.
At some point, your score will improve, but it will be a gradual process. Managing your debt, staying on top of payments, and maintaining a low balance can help.
Tapping Your Retirement To Pay Off Debt
People generally avoid bankruptcy like the plague. Nearly 50% of Americans would refuse to file regardless of how much debt they owe, according to a recent NerdWallet study. Roderick H. Martin, a bankruptcy attorney, recalled several clients who withdrew from their retirement fund to avoid bankruptcy.
However, this just postpones the unavoidable, and “then they turn around and file for bankruptcy,” he told NerdWallet. Your retirement fund is usually safe from bankruptcy, but you’ll never be able to get the money you withdrew back.
Cosigning A Loan
Financial planner Aaron Smith cautioned that becoming a cosigner can be a costly mistake. “My personal and professional opinion is if they can’t get it on their own, there must be a problem,” he stated.
If the other person doesn’t hold up their end of the agreement, it can ruin your relationship and your credit score. Even if they stay on top of payments, keeping your name on the loan can restrict your ability to borrow money. So before you agree to anything, see if you have the option to take your name off the loan eventually.
Neglecting To Review Your Credit
“I think checking your credit is like going to your dentist for a cleaning,” certified financial planner and Family and Money Matters Institute founder Elaine King told NerdWallet. ”You need to make a habit of doing it. If you wait too long, there can be some rotten stuff there.”
Your credit report isn’t exactly a gripping read. It’s just a review of your past credit accounts and history. However, boring is good because it means no errors are ruining your credit, which you would otherwise have to dispute.
From now until April 2021, you can check your credit report for free every week from each credit agency through AnnualCreditReport.com. After that, make a point to check once a year, if not once a quarter.
Overlooking The Fine Print
If you don’t know the interest rates or when the introductory period ends on your credit cards, you could set yourself up for trouble.
Understanding your cards’ rates can give you a better idea of which card to use for a big-ticket purchase (such as a car repair) since you’ll likely be paying the balance for several months. Also, when you know when your card’s zero-interest introductory period ends, you’ll have a timeframe to pay off as much of the bill as possible before incurring interest.
Always make sure to read the terms and conditions. Some types of credit cards, like branded store cards, levy deferred interest if you carry a balance by the time the introductory period expires. This will cause you to lose any benefits or savings you enjoyed from the welcome offer.
- O’Shea, Bev. “5 Credit Mistakes That Can Come Back to Bite You.” MarketWatch, MarketWatch, 24 Dec. 2020, www.marketwatch.com/story/5-credit-mistakes-that-can-come-back-to-bite-you-11608311501?mod=personal-finance.