Good credit is one of those things that you may not realize how valuable it is until you need it. Obviously, credit card issuers and lenders use your credit score to make decisions about your applications. But other businesses – insurance companies and cell phone service providers, for example – also use your credit score.
Bad credit doesn’t happen by accident. You probably already know the importance of paying your bills on time, but there are many other things that can indirectly impact your credit score. Here is a list of things you can do to prevent bad credit.
Avoid using credit to make ends meet.
It’s tempting to rely on your credit card when you’re not making enough money to pay all your bills. Credit will allow you to spend more than you actually have, but only up to a certain point. Once you hit your credit limit, you won’t be able to use your credit card for bills. If you’re having trouble making ends meet, focus on increasing your income and cutting your expenses so you can afford things. Credit cards will only put you further into the hole.
Avoid using credit for things you can’t afford.
Let’s say you can pay all your bills and expenses comfortably from your income. But, you don’t make enough money for the extras – vacations, holiday shopping, or new electronics. Avoid making the mistake of putting these purchases on a credit card, rationalizing you can simply pay the minimum until you can pay more. Unless you’re able to put your credit card away until it’s paid off, you’re on a slippery slope.
What tends to happen is you keep using your credit card until it’s maxed out or they’re all maxed out. By that time, your minimum payments are very high, sometimes unaffordable, and you start missing payments. It’s much wiser to live by the rule of thumb that if you can’t afford to buy it, then you can’t afford to charge it.
Don’t open too many credit cards.
Having too many credit cards can directly affect your credit score, but the specific number will vary from person to person.
The real problem with having too many credit cards is that you risk creating more debt than you can afford to pay. The more credit cards you have, the more payments you have to make, and the bigger the risk there is in hurting your credit score.
Keep your positive accounts open.
Your credit score benefits from open, active accounts with a positive payment history. If you’re considering closing any of your accounts, make sure you leave the positive accounts open because they’re boosting your credit score. Accounts don’t fall off your credit score when you close them, but they may affect your credit score less since they’re not active.
Pay your credit cards and loans on time each month.
Payment history has the biggest impact on your credit score, so it’s important that all your credit card and loan payments are on time. If you’re late on a payment to a credit card or loan, your credit can be affected, particularly if your payment is more than 30 days late. The more late payments you have on your credit report, the more your credit score is affected.
Not only do late payments hurt your credit score, but they also make it harder to get caught up. The further behind you are, the more you have to pay to catch up. After missing the first payment, it’s a slippery slope to having your account charged-off or your loan defaulted. Staying current on your payments is one of the best ways to prevent bad credit.
Pay your credit card balance in full each month.
Paying off your full credit card balance will keep you from getting too much credit card debt. Each month, you’ll start over with a zero balance. And if you don’t charge anything that month, you don’t owe anything.
Carrying a balance from month to month means you’re required to make your monthly minimum payment, whether it’s easy for you or not. The months you can’t afford to make your payment, you have to pay anyway or deal with the consequences of a late payment.
Don’t let accounts get defaulted.
Accounts go into default after about six to nine months of missed payments, depending on the type of account. After that point, your credit report will update to show the default and the account will be due in full.
Creditors are usually willing to work with you before the default. If you’re having trouble making payments on a debt, contact your creditor or lender to workout a payment arrangement. They may be willing to reduce or suspend your payments for a few months until you get back on track.
Work with the IRS and state revenue department.
Unpaid taxes can wind up on your credit report if the IRS or your state revenue department files a tax lien against you. You may have time to avoid that step.
When you get the first tax bill, work out a payment arrangement that will allow you to pay your taxes on time. You can typically avoid a tax lien as long as you stick to the terms of the agreement. Check all your mail from revenue departments, you’ll often have several notices before a tax lien is actually filed against you.
Don’t buy more house or car than you can afford.
When you’re shopping for a major buy like a home or car, it’s important that you only buy what you can afford. If your monthly mortgage or car payment is too high, you may have a tough time making your payments. And if you thought getting caught up on late credit card payment was tough, you never want to see how hard it is to pay a past due car or mortgage payment.
Build an emergency fund.
The amount of money you have in a bank account doesn’t affect your credit, but an emergency fund can prevent bad credit. When you have an emergency fund, you have access to savings that can save you in case of an emergency, like an unexpected medical expense or car repair. The more you have in your emergency fund, the better off you are. You won’t have to borrow money you can’t afford to repay to cover an emergency expense.
Follow up on medical bills.
Medical debt is a huge problem in the United States and unfortunately, unpaid medical bills can ruin your credit. When they’re left unpaid, medical bills are often sent to a collection agency. And that’s how they wind up on your credit report. Once a collection is on your credit report, it typically stays for seven years.
If you get a bill from a medical service provider, check to make sure the expense wasn’t covered by your insurance. If you don’t have insurance, try to work out a payment arrangement with the medical service provider. As long as you keep up with your payments, you can avoid having the account sent to a collection agency and it stays off your credit report.
Use a budget to plan your money.
Of course, the budget itself doesn’t factor into your credit score. But, your financial habits play a major role in how you manage money and how you pay your bills. You’ll find it much easier to stay on track with your payments when you’ve planned how to spend your money for the month. Sticking to a budget can have other benefits too. You can ensure your bills are paid on time, save more money, and work on paying off debt.
Live within your means.
“Living within your means” means that the lifestyle choices you make fit within your monthly income. Where you live, what you drive, what you eat, the clothes you wear, etc. all line up with the amount of money you make. You run into money problems – and eventually credit problems – when you start spending more money than you’re bringing in each month.
Signs you’re living outside your means: using your credit cards for bills, dipping into savings, overdrafting your bank account, and borrowing money for expenses.
Don’t ignore money problems.
Few problems cure themselves – and money problems are no different. If you’re not making enough to cover your bills, the problem isn’t going to just go away. You have to actively work on correcting the problem and curing your financial issues. Otherwise, they’ll get worse, start affecting your credit, and become harder to fix.
Take on a second job if you have income loss.
It’s harder than you might realize to survive a pay cut. Whether your wages are cut or you’re losing work hours, a loss of pay can put a strain on your finances that leads to late payments or having to rely on your credit card.
Do something as quickly as possible to make up that lost income. That could mean taking on a second job, starting a money-making hobby or side business, or finding a new job all together.
Use your budget to decide if you can afford another monthly expense.
How do you decide whether you can afford to upgrade your cell phone service, add a premium package to your cable, or add internet to your cable plan? Many people just assume they can afford it without checking their finances first. It’s better to use your most recent monthly budget to confirm you can actually afford another monthly expense.
Check your budget to see how much money you typically have left after all your expenses have been paid (including savings). If you barely have enough money leftover to cover the new expense, it’s better to wait until there’s a little more room in your budget.
Don’t ignore any bills.
Any bill you owe can potentially affect your credit, even if the company doesn’t regularly report to the credit bureaus. Many companies hire third-party debt collection agencies to go after unpaid bills. Once the debt collector has been hired to pursue the debt, they’ll report the account to the credit bureaus and your credit will be affected. The best way to keep collections off your credit report, is to pay all your bills.
Don’t ignore bills you think you don’t owe. Work it out with the business to keep them from sending the debt to a collection agency.
Avoid cosigning for others.
Cosigning is almost always a bad idea for the cosignor. When you sign a loan with someone, it’s just like you’re taking out a loan of your own. The difference is that you don’t live in the house or drive the car you’ve cosigned for. You’re just as responsible for the payments and any missed payments hurt as if they were your own.
Not all cosigning relationships end up badly, but enough of them do to show that it’s not a risk you want to take.
Protect your personal information.
With enough of your personal information, anyone can open a credit card or loan in your name. And since thieves aren’t exactly honest – they wouldn’t be thieves if they were – they’re not going to pay the bills they’ve opened in your name. Those unpaid bills end up on your credit report. Though you’re not legally responsible for paying the bill on accounts you didn’t open, you still have to deal with damaged credit while you clear up the identity theft.
We share so much of our personal information with various businesses. That makes it difficult to be 100% safe from identity theft. Still there are a few ways you can protect yourself. Don’t carry your social security card with you – if you lose your wallet you don’t want to lose this too. Shred anything that has your sensitive personal information on it. Use secure passwords for all your websites. Only enter your personal information on websites you trust. And never send personal or financial information over public wifi.
Don’t break a lease.
A broken lease can hurt your credit even if your landlord doesn’t report your monthly rent to the credit bureaus. If you leave a balance at your rental, your landlord may report the delinquent balance to a credit bureau. Or, they may hire a collection agency to pursue your debt and the collection agency will add the account to your credit report.
If you need to move before your lease is up, discuss your options with your landlord. You may be able to pay a lease-breaking fee or sublease your apartment and avoid having an unpaid balance when you leave.
Check your credit often.
By staying on top of your credit score, you’re more likely to make decisions to protect it. You can check your credit score for free by signing up for a service like Credit Karma or Credit Sesame. You’ll be able to see changes to your credit score and receive information about the factors that are most affecting your credit score.