Destroy your credit score and you’ll be locked out of the lowest rates in history. Here’s how to avoid ruining your credit.
We’re quite a bit more relaxed about debt here at PeerFinance101 than most personal finance blogs. We see debt as a financial tool rather than a burden, helping you to get the education, home and car you couldn’t otherwise afford. It’s a fine line though and plenty of ways to get in over your head, destroy your credit and get locked out of the credit game.
Destroy your credit and you’ll see interest rates skyrocket, sometimes even for money you already borrowed. You’ll also be locked out of getting new credit and miss out on being able to take advantage of the lowest rates in history.
Among the ways to ruin your credit score, none are easier and costlier than the mistakes people make with their credit cards. Make sure you aren’t making these credit card mistakes and on your way to credit calamity!
Fastest Ways to Destroy Your Credit Score
These ways to wreck your credit score aren’t in any particular order. All are pretty common among credit card holders and each one will put you in the debt dog house.
10) Applying for too many cards at once.
There are a couple of problems here that can get out of control really fast. First, applying for that much credit goes on your credit report and affects your credit score. If you need a large loan within six months, you might not be able to get it if your credit score hasn’t recovered.
It’s also too easy to get in over your head when you have a lot of credit cards. You might not even realize it until you’ve got a couple of grand charged on each card. Heaven forbid you should miss one of the payments. Your rate jumps and you can’t make other payments. In no time, you’ve destroyed your credit score and are drowning in debt.
9) Getting Hooked by Introductory Rates
Low introductory rates of 0% are tempting, especially if you’ve got other credit card debt you can consolidate. The problem is that the credit card company uses a bunch of reasons to reset your rate much, much higher. If you don’t hit one of these triggers then your interest rate will still reset higher when the introductory period ends. You will have gotten used to making minimum payments on 0% and will be blind-sided when that statement comes charging 20% on your balance.
If you need to consolidate your debt to make managing bills easier, consider a debt consolidation loan instead. These have one interest rate throughout the loan and a fixed payoff. Better still, the loan goes on your credit report as non-revolving credit which doesn’t affect your score as badly as revolving (credit card) debt. Your credit score will improve and you won’t be tempted by another card.
8) Missing those Sneaky Credit Card Terms
Most people don’t read the fine print on their credit card offers. I try but it always puts me to sleep. Problem is that there are all kinds of misleading tricks in there to charge you a higher rate and destroy your credit score.
The worst is two-tier balance transfer fees where you pay one temptingly low fee for credit card transfers but another much higher fee for cash transfers. It’s there in the fine print but you won’t see it and it will cost you hundreds.
Another hidden clause is how your rates change if you miss a payment or go over your credit limit. That introductory rate disappears and you’re left paying almost 30% on your balance, enough to put you deep in debt doo-doo!
A newer one is the security interest clauses which allow the credit card company to come repossess the items you bought with the card if you miss a payment. You’ll destroy your credit score and lose your stuff…double whammy.
7) Making only Minimum Payments
Making only the minimum payments on your cards is probably the worst and most often seen way people ruin their credit. It makes sense right? That’s all they’re asking for so why pay more?
Making only the minimum payments leaves you open to getting in way over your head or just being a slave to debt for decades. Make just the 1% balance plus interest minimum that most cards require monthly on a $5,000 balance at 14% and you’ll pay another $5,000 in interest over 18 years. That puts you in the credit card company’s pocket.
6) Paying your Bill Late
Paying your credit card late is still better than not at all but it will destroy your credit score all the same. That missed payment will show on your credit report for months and your interest rate will default to the maximum allowable by law.
Set your card up for automatic payment of the minimum just in case you forget. There are free email messaging services that will send you a note each month a week ahead of your due date. Tie a string around your finger…whatever you need to do to keep from missing a payment and ruining your credit score. These kind of bad marks on your credit report can be some of the worst for decreasing a credit score.
5) Not Checking your Billing Statement
This is another credit card mistake that’s really easy to do. You might scan a few of the charges but that’s about it, what else is there? A lot as it turns out.
Credit card companies love to change billing dates and credit terms. They put it all there on the statement in black and white…didn’t you see it? They make their money when you miss the changes and end up paying a mountain of fees.
You only have 60 days to dispute a charge on your card. Check your statement as soon as it arrives and immediately question any charges you don’t recognize. Not only will it clear you from liability for fraudulent charges but can keep more from going on the card.
4) Getting Close to Your Credit Limit
Charging more than 30% of your credit limit on your cards starts to affect your credit score. This is because credit utilization is a big part of how your score is calculated. Utilization is just the amount you have on balances compared to the amount of credit available.
Have lots of credit available and it looks like you’re in good shape. Start maxing out your cards and it looks like you could get into trouble quick…and your credit score will start to show it.
Besides, getting close to your credit limit just adds to your monthly interest payment and makes it more likely you’ll exceed the limit. That means hefty over-limit charges.
3) Exceeding Your Credit Limit
Ok, so this one is related to the previous way to destroy your credit but there’s the extra humiliation of having your card denied in public. Avoid over-limit fees and high interest with a little credit discipline and don’t get into trouble.
2) Loaning out Your Credit Card
Don’t think just because someone else makes those charges that you’re not responsible for the bill. Unless your card was stolen, you’ll have to pay every charge on the statement. Understand that the credit card company isn’t going to care if your friend said they would pay you back and didn’t…to them it’s all the same.
If you want to do someone a solid, go with them to charge the card instead of just loaning it to them. Maybe I’m being paranoid but it’s just too easy for someone to make ‘a few extra charges’ on your card once they have it.
1) Letting your Credit Cards get Charged-Off
It generally takes about six months of missed payments before the credit card company will put your card in charged-off status and send it to a collection agency. At this point, your credit is more than destroyed and you have to deal with nasty collection calls.
That default on your card will stay on your credit report for seven years. If you are able to get any more cards, they will be at super-high interest rates. Good luck getting a home loan or car financing from anywhere but buy-here-pay-here. Take it from someone that has ruined his credit and had to claw back to a better score, you don’t want to be there.
If you do fall into one of these credit card disasters, check out our 21 steps to fix a bad credit score fast. It’s got everything from quick fixes that take a couple of months to longer-term ways to boost your credit score.
If debt is a financial tool, credit cards are a stick of dynamite. While fixed-rate loans have a set payment and payoff date, you don’t have the certainty with credit cards. They can save you if you need emergency cash but they can also destroy your credit score in a heartbeat. Rewards cards are alright but you have to set a mental note in concrete that you pay them off every month or you’ll pay more in interest than the rewards are worth. Tread carefully with credit cards, use other forms of debt wisely and avoid ruining your credit score.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.