Rick has mentioned time and time again that your credit is one of your most important assets. He’s explained and hopefully debunked a bunch of credit myths. Email him and ask for what card to apply for, or when to apply, he’ll gladly respond and give you his best conservative advice. To be successful with your credit you’ve got to be patient, and responsible. Some are absolute no-no’s and others really depend on your situation (like co-signing on a loan). Here are my list of things to not do:
- Paying your bill late / not paying – Paying your bill, and paying it on time is a must. Even if you cannot pay your bill in full, make a payment. Ignoring a bill is breaking a promise / commitment that you’ve made to your lender. On-time payments, and the history of your on time payments account for 35% of your FICO and 32% of your VantageScore credit scores.
- Making only the minimum payment – In stark contrast to not paying at all, while making at least the minimum payment is a must, by paying just that you’re increasing the amount that you’ll pay on the money “borrowed” from the creditor, and at the same time not reducing your credit utilization. Credit Utilization accounts for 30% of your FICO and 23% of your VantageScore credit scores. (#1 and #2 are my absolute no-no’s. No flexibility on this at all. If I can’t pay my bills and pay them on time, then I adjust my spending accordingly, or talk with my family for help)
- Co-signing for a credit card – Co-signing for a credit card, or co-signing for a loan are two of the riskiest things out there. You are trusting your good credit with someone else. I’d sooner lend someone cash (where I can mitigate my risk to the amount of cash I give them), versus sign a loan to procure something they’d otherwise be unable to get. Heck, with our mortgage on our home, only my name is on the loan (both of our names are on the deed; no need to make someone else responsible when it isn’t needed). I’m not saying this is a definite no-no; just realize that when you’re co-signing on something, you are now equally liable for that debt / commitment.
- Letting someone else use your credit card – This is a funny one. I often keep Sara’s cards on my desk, and when she goes out shopping she’ll take my card. We’ll do this to hit minimum spends after a round of successful applications or if there is a bonus at a particular place we’re shopping. That said, just like co-signing give a card to only someone you trust to use. If that person buys something that you’re not ok with you’ve got a different set of circumstances as your card wasn’t stolen, but rather you provided it to them.
- Adding an authorized user to your card – A double-edged sword with this one. Some card issuers offer bonuses ranging from 1,000 up to 5,000 for every authorized user you add to a card. You get a bump in your bonus, and whatever the person with the card charges you get miles / points for. That said, you’re ultimately responsible for their debt. Adding an authorized user can also serve as a great way to help that person build up their credit file. Depending on the issuer, they may ask for the authorized person’s social security number … if that’s the case you can bet this card will show up on their report. In the example of a husband and wife each applying for cards, if you’re not getting a bonus for adding an authorized user, but are supplying their social security number, you’re possibly doing a disservice to their credit as you’re adding another unnecessary inquiry to a report and potentially holding them back from successfully opening an account in the future.
- Balance transfers (take from Peter to pay Paul) – The only time I find it acceptable to carry a balance on a card is if the interest rate is 0%. When we bought our house we got a store credit card for furniture we bought; it came with 24 months of interest-free financing. We took it, and it was a smart decision for us. I have several friends that have made purchases, car repairs, home improvements, etc leveraging 0% interest credit cards and also by performing balance transfers. Balance transfers can be a good thing (even though you’re usually paying a fee to transfer), if you can decrease the rate you’re paying. When stuck with a 14.99% APR on a card with an $8,000 balance of car repairs, appliances, and part of some needed shopping, transferring a balance to a card with a lower APR or 0% APR is a smart thing. The problem with balance transfers come in when you don’t leverage the benefit of time and money you have bought yourself (lower rate, set time to get the balance paid), and don’t properly save / adjust spending to ensure that the balance gets paid off in time. Balance juggling can be a dangerous game to play and in the long run can cause a lot of damage.
- Getting Rid of all of your cards – Next to not paying your bills, eliminating all of your credit is one of the worst things you can do. Eliminating credit accounts, while it may take temptation away, effectively indicates to creditors that you’re not in a position where you should be trusted with a loan/line of credit. Your credit history is representative of how you have managed your loans and lines of credit. By eliminating accounts, you’re indicating that you want to wipe the slate clean. Wiping the slate clean is what someone with negative/poor remarks on their credit report or someone going through a bankruptcy would want to do.
- Opening too many cards – Sara and I will each likely apply for 9 or 10 cards in total this year. We’ll do this in batches of two to four, every three to four months. We use those cards, meet any spend requirements, and then leverage the card when it makes sense for us. When we do our applications we do them all in the same day, within about 5 minutes of one another. By applying for cards all at once / during the same day we avoid a possible “too many recent inquiries” scenario when the creditor pulls our credit report; they don’t see the other inquires that are being made in real time. We’ll never apply for one card on Monday, another on Tuesday, and a final on Wednesday. The technique that Rick uses, which is what we follow, allows us to be organized, and get things taken care of all at once. That said, applying for 5,6,7 cards all at once is another dangerous proposition … don’t bite off more than you can chew. If you think you can handle 4, do 3. Take things slowly.
- Not checking your credit report / credit scores – Want to be a victim of identity theft? Want an inaccurate report? Want to get denied for that auto loan, student loan, or mortgage? Every year with AnnualCreditReport.com we get FREE credit reports from all of the three major bureaus. With CreditSesame (Experian) and CreditKarma (TransUnion) you can get two of your three credit bureau scores for FREE. It takes 15 minutes to get your reports and check your scores, and again, they’re all FREE. Check them, make sure they look right. If something is wrong, get it fixed. There are also lots of free trial services out there. Spend the 10 minutes, sign-up, and then cancel within the trial period if you don’t want to pay the monthly charge.
Some of these can be a bit subjective, and in certain circumstances you’ll handle things differently. What else would you add to this list? (or would you remove?)
Deal of the Day
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