THE BROKEN WALLET

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How to use credit responsibly!!! Here’s what you’re doing wrong…

Building a credit history makes it easier to purchase a home, car, and get other types of loans. Plus, a good credit rating often results in better insurance rates, and your utility companies might waive deposits when setting up services. 

But although applying for a credit account is the first step to building or rebuilding credit, you must use credit responsibly to have a strong score. Establishing good credit involves more than paying your bills on time, though. Not to say this doesn’t help in a big way–but you have to do more.

So whether you’re building credit for the first time or rebuilding after a history of bad credit, here’s a look at 10 ways to use credit responsibly. 

1. Check your credit reports

Negative credit report errors can reduce your personal score. This can make it difficult to qualify for financing, and you’re less likely to get a great interest rate. 

Financial experts encourage consumers to check their credit reports at least once a year. You’re entitled to one free credit report from each of the major credit bureaus annually—Experian, Equifax, and TransUnion. 

Go to AnnualCreditReport.com to get a free copy of all three reports, or contact the credit bureaus separately to request your individual copies.

2. Don’t carry a credit card balance

Maxing out your credit cards also reduces your credit score. Ideally, credit card balances should remain below 30% of your credit line. So if you have a credit card with a $1,000 credit limit, your balance should never exceed $300. 

To avoid carrying a balance, set a monthly budget for credit card purchases, and stick with this budget. Only charge what you can afford and pay off your balance in full every month.

3. Pay your bills on time

Whether you have a credit card, a student loan, an auto loan, or another form of credit, always pay your bills on time. Missed payments can lead to costly late fees. And if your payments arrive more than 30 days past their due dates, creditors can report the delinquency to the credit bureaus, which can lower your score.

4. Use rewards responsibly

Rewards credit cards are an excellent way to earn miles or cash back on every $1 you spend, which can help you save on future purchases. The more you use the card, the more rewards you earn. The problem, though, is that rewards programs can increase the risk of overspending.

You shouldn’t use a credit card for the sole purpose of earning rewards. This is how many people get into debt. Especially since many credit cards offer bonus rewards when new cardholders spend a certain amount within a few months of opening an account.

Again, only spend what you can afford, and always pay off the card in full every month.

5. Know the danger of cosigning

If you have good credit, someone might ask you to cosign a loan. This can include a child, sibling, other relative, or maybe a friend. But while you might feel inclined to help, cosigning is risky business. 

As a cosigner you’re responsible for this debt if the primary signer doesn’t pay. A cosigned loan will also appear on your credit report, impacting your debt-to-income ratio. This can make it harder—or impossible—to get a loan of your own. 

Now, I can’t tell you what to do. Just make sure you fully understand the risk before putting your credit on the line. Remember, there’s a reason why this person can’t get a loan on their own. So you need to investigate and figure out “why” they need a cosigner.

Because if this person has a history of “not” paying their bills on time, they’re not likely to pay this loan on time either. 

6. Review your statements

Some people have a bad habit of never taking a close look at their financial statements. But it’s so important that you review your credit card (and bank) statements on a weekly or monthly basis and look for signs of fraudulent activity.

If you don’t recognize a purchase, contact your credit card company immediately to dispute a charge.

7. Don’t close an old credit card

Closing a credit card account might seem like a logical solution if you’re trying to pay off debt. A closed account eliminates the temptation, right?

But although this move prevents new charges, closing an older credit account can also shorten the length of your credit history, which negatively affects your average credit age.

Length of credit history makes up 15% of your credit score. This is need-to-know information because people with a longer history typically have a higher score. So if you’re trying to pay off debt “and” improve your credit score, closing your oldest account could do more harm than good.

Rather than cancel an older credit card, cut the credit card in half to prevent use.

8. Report lost or stolen credit card (quickly)

If you lose your credit card—or believe it’s been stolen—contact your credit card company immediately. The sooner you act, the better. 

If you don’t know whether the card is lost or stolen, ask your credit card company to temporarily freeze the card. This way, no one can make fraudulent purchases with it.

9. Keep accounts active

Keep in mind that using your credit cards can also raise your credit score. If your credit card becomes inactive, your credit card company might stop reporting activity to the bureaus. So even if you prefer paying for items with cash or a debit card, dust off your credit cards about every 3 to 6 months and make a small purchase, and then pay off the purchase in full.

10. Don’t let others borrow your cards

It’s also important to keep a close eye on your credit cards. This includes not letting anyone use your card, and not sharing your credit card information. If you allow someone to use your credit card and they charge too much, you’re responsible for the balance.