We all do dumb things with our money from time to time. Unfortunately, sometimes those financial missteps can wreak havoc on your credit. Maintaining a good credit score is vital, because it is the key to securing the most favorable loan terms. A poor score can result in higher interest rates or denial of a loan. The Cheat Sheet chatted with Michelle Black, credit expert and president of HOPE4USA.com, a Charlotte, North Carolina-based credit education and restoration program, to get her advice on some major credit blunders to avoid.
The Cheat Sheet: What is the worst credit management mistake a consumer could make?
Michelle Black: Simply put, not paying your bills on time, every single time, is the worst credit management mistake you can make. Credit scoring models like FICO are built with the specific purpose of predicting your credit risk — the risk of you borrowing money from a creditor and not paying it back according to the terms of the loan. Unsurprisingly, creditors do not like to lend money to people who are not going to make their payments as agreed. As a result, FICO and other credit scoring models place a huge emphasis on your payment history. In fact, 35% of your FICO scores are assigned from the payment history category of your credit reports. If you pay your bills late your credit scores are going to suffer, period.
The Cheat Sheet: What are some do’s and don’ts of credit card management?
Michelle Black: FICO, VantageScore, and other credit scoring models also pay a lot of attention to your credit card debt. A whopping 30% of your FICO scores are largely based upon your revolving utilization ratios, which is also known as the relationship between your credit card limits and balances. Having lower credit card balances leads to lower revolving utilization ratios and, by extension, leads to higher credit scores. In order to make sure that your credit card accounts benefit your credit, rather than hinder your credit, it is important to resolve to never charge more on a credit card account than you can afford to pay off in a single month. Charging more than you can afford to pay off in a given month can easily snowball into major credit and financial problems in the future.
CS: In general, how can you make sure your credit reports and scores stay in tip-top shape?
MB: The most important step you can take in order to ensure you achieve and maintain good credit is to stay aware. You should develop the habit of checking your credit reports and scores routinely, at least every quarter, but perhaps even every month. Being consistently aware of what is on your credit reports will help you to both monitor for errors and help you track your credit scores. Of course paying your bills on time and keeping your credit card balances low are both crucial steps which you must follow in order to earn truly healthy credit. Keeping a close eye on your credit reports and scores will make earning and keeping great credit a much easier task.