Eight Simple Steps to Avoid Bad Credit

Credit Score. Excellent, Average, Poor

Credit Score. Excellent, Average, Poor

When you decide to open your first credit card account, every purchase, action or inaction, will move you towards a good or bad credit rating. Making smart choices with your new credit is important to your financial future, so avoid bad credit by following these eight simple rules.

Pay Your Bills On Time

Most important? Pay your monthly bills on time. Payment history is the single biggest factor used to determine your overall credit score. Missing a payment by 30 days or more negatively impacts your score dramatically. Even worse—skipping multiple or consecutive payments can lead to repossessions, cancelled cards and foreclosure on your home.

Even though items such as your monthly electric bill or cell phone invoice aren’t typically reported to the credit bureaus, if you fall behind and end up in collections, the delinquency will most likely find its way onto your credit report. Don’t overlook the small stuff, even a library fine can negatively affect your credit score if not resolved.

Know Which Bills Report to the Credit Bureaus

If you end up in a situation where you cannot pay all your bills, protect your credit score by prioritizing the bills that report directly to the credit bureaus— your mortgage, credit card and any loan. This doesn’t mean you can skip other bills indefinitely. They too need to be paid as soon as possible to avoid collections and a negative impact on your credit score, but this strategy can buy you time to get on your feet. 

Don’t Overreach with Credit Debt

Accrued debt is the second largest factor in determining your credit score. The score itself reflects both the amount of debt you have attached to your name and compares it to the limits your credit card company allows. If you have a loan, the credit score will compare the remaining amount due versus the original loan amount. In short, this tells future lenders what kind of borrower you are and if you are prone to spending more than you can afford to repay in a timely fashion. If possible, keep your credit balances as low as possible and lenders will view you as a smart borrower. 

Be a Good Money Manager

If you make good decisions with money in general, it should transfer over to making good choices with the credit line at your disposal. If you can stay out of debt, your credit score will go up, helping meet your future financial goals. 

Think Before You Leap

Every financial purchase you make impacts your ability to pay your bills at the end of the month. A new cell phone, a new car, adding channels to your TV subscription, etc., all affect your ability to pay your bills on time. Weigh the cost before you decide to add any financial obligations.

Keep the Number of Cards in your Wallet to a Minimum

Every application for a new credit card results in an inquiry on your credit report. Inquiries account for 10 percent of your overall credit score. This means a possible drop in your score by dozens of points! Too many applications can mean too many cards, too many inquiries on your credit report, too many payment deadlines and too high of a combined balance in credit debt to manage. If possible, have just one or two credit cards at a time.

Know When You Are in Financial Trouble

Relying on credit cards to sustain you through tough times is a losing battle. Instead, try harder to limit your spending and to live within your current means. Working overtime or getting a second job might be an unfortunate necessity. Simply adding to your credit debt is not the answer.

Healthy Savings is Key

It might sound counter intuitive, but having a nice savings account will not directly get you a better credit score. But, by having a nice “rainy day” savings account, you can fall back on your reserves to pay a higher than expected credit card bill on time.  Remember, late payments are one of the worst things you can do to your credit standing. By saving money now, you can rest easy when the unexpected happens and avoid a negative mark on your credit. 

Unexpected unemployment, divorce, injury. Unfortunately bad things happen. Having good financial habits in place can help you weather the unexpected without damaging your credit or sinking into debt.