Credit cards and loans can help you lead a better financial life if they are used correctly, but mistakes can cause financial hardship and years of anguish. Managing credit correctly requires a certain amount of discipline and it is important to have some guidelines for borrowing sensibly. Here are several rules that every consumer should know about keeping their finances manageable and keeping credit scores as high as possible.
Do Not Miss Any Payments
If you want to establish good credit scores, having an unblemished payment history is key. Payment histories have the largest impact of all the components used to calculate most credit scoring models, so having one missed payment can cost you dearly. Missed payments not only damage your credit score, they damage your wallet too, as late payments typically trigger penalty fees and increases in the annual percentage rates for credit accounts. Try to set up automatic payments for as many of your bills as you can to reduce the risk of missing a payment on any account.
Do Not Max Out Your Credit Cards
Your credit utilization ratio is another big factor in the calculation of your credit score, so maxing out your credit cards can have a devastating effect on your score. Try to use only 25% or less of all your available credit at any given time to keep your scores from taking a dive. You do not need to carry balances to have a good credit score so try to pay off your balance each month if you can. If you cannot, pay as much as you can and pay off the balance as quickly as possible to limit the amount of interest you will be charged. Never use a credit card as a replacement for an emergency fund.
Do Review Your Credit Report Regularly
Consumers should review their credit reports for errors and other issues at least once a year. This allows you to see your credit trends and alerts you to any mistakes that have been made on your credit report within a reasonable time frame so the errors can be corrected with a minimum of hassle. If the report shows accurate information that would lower your credit scores, consider boosting your score before applying for any credit cards or installment loans. Each consumer is entitled to one free credit report from each of the three main credit-reporting bureaus annually, so take advantage of this free service to examine your credit report.