This monthly series by personal finance specialist Amanda Reaume focuses on how to improve something that many people overlook: your credit score. These posts will give you tips and tricks to improve your chances of getting approved for better rates when you apply for credit – leading to better student loans, car loans and even mortgages.
In January, people tend to cut back on certain expenses as they rehabilitate their credit and make up for overspending during the holidays. Less shopping, less restaurant visits, less entertaining… The effects that overspending have on lifestyle are usually pretty apparent.
But what many may not realize is how a bad credit choice can have a huge, long-term impact on your credit score. Some of these choices may seem harmless upfront, but they’ll ultimately make it harder to qualify for a low interest rate when you borrow money, whether it be for a car, your tuition or even a house.
If your credit cards are getting a workout this month, here are some common credit mistakes you may have made and some suggestions on how to fix them.
Mistake #1: You charged up your cards
Even if you’re not well-versed in the whole credit system, you’re probably aware that maxing out your credit cards will impact your credit. But even if you didn’t use up all your available credit, your credit score could still be negatively impacted. This is because your credit score is calculated based on your credit utilization. Experts recommend that you use just 20 per cent to 30 per cent of the available credit on each card. So if you’ve spent more than that – you will likely see some impact on your score. How much will greatly depend on your particular credit history and score.
Solution: The easiest way to fix this is by quickly paying down your debt so that it’s below the 30 per cent used margin. So let’s say your limit is $1000 – 30 per cent of $1000 is $300. If your balance owing is $500, you should at least pay down $200 as soon as possible to reach the 30 per cent margin.
If you can’t do that, you could call your credit card company and ask if they are willing to increase your credit limit. By increasing your limit, you lower the percentage of credit that you’re using. Sometimes your credit card company will be willing to pre-approve you without doing a credit check and increase your limit.
Mistake #2: You Applied For Too Many New Cards:
While you were out and about during the holidays, at malls and events and what not, you likely encountered sales reps offering great bonuses to sign up for a premium credit card – a free gift card, appliances, rewards points for a specialty program, or even a t-shirt. You may have even signed up for a store credit card (in-store or online) to get a bonus offer discount on your purchase. Some of these deals are even up-for-grabs with just a pre-approval.
But freebies and rebates aside, signing up for multiple cards could knock points off your credit score, doing you more harm than good. Ten per cent of your score is judged based on how often you apply for credit.
Solution: Trends show that people tend to apply for multiple credit accounts when they are having financial difficulties. As a result, your score usually gets dinged when you apply for too many new credit cards. While one new credit application per year may be fine, three or more can impact on your score. So if you are guilty of doing this in the past, the best way to deal with this problem is to wait it out. The longer you go without a new credit inquiry, the more your score will improve. And the next time someone offers you a bonus to sign up for a card – just say no.
Mistake #3: You skip or make late payments
It’s easy to go overboard on spending during the holidays. And if you’re feeling financial pressure from credit card debt this month, it may be tempting to opt for the minimum payment, or just defer payment all together. However, one late payment can put a huge dent in your score. Payment history accounts for 35 per cent of your overall credit score.
Solution: Find a way to pay the full minimum payment on time. While it may mean reorganizing your budget or finding a way to make a little extra money in January – it will make a huge difference. Perhaps you can even return some of the gifts you bought now before it’s too late, sell them online, or put them away for regifting later in the year. It’s not for everyone, but it’s definitely an option to save some cash.
If you’re struggling to make minimum payments, look into the best low-interest cards and low-balance cards available at RateSupermarket.ca. These types of credit cards can make paying off debt a lot more attainable.
Make good credit choices this year
Even if you haven’t made any grievous spending mistakes during the holidays, your credit score is still at risk of decreasing if you don’t take the proper actions to maintain it. Protect your score by making smart credit choices this year.
For example, if you have multiple cards but only put your purchases on one, try spreading purchases out over all your cards to ensure that no one card exceeds the 30 per cent used margin mentioned above. If a single purchase exceeds the margin, try paying off half the balance mid-month before continuing to spend on it.
And if you’re still concerned about your credit, you can always try modifying your budget or paying for everything in cash. With a few small adjustments, your can reverse the negative effects on your credit score, giving you the financial freedom you need.
To check out the last post from the How to Improve Your Credit Score series, click here.