Top 10 Credit Mistakes

Most children are not trained in how to handle credit by their families other than with vague platitudes like 'pay your bills on time' and 'live below your means.' Practical knowledge about interest rates, revolving credit and credit scores was often not taught or even understood well by most parents. Instead, we grow up being taught to be consumers, watching our parents struggle with the same concepts we now struggle with. Most people discover these mistakes by making them. So here is a list of the top ten credit mistakes most often made with a little help on why to avoid these blunders.

10. Closing your paid off credit card accounts
Paid off credit cards are like gold to your credit score. Resist the urge to cut up the plastic and close the account. The unused 'credit available' on that card will contribute to your credit worthiness. Put the cards in a block of ice in your freezer if you need help not using them and keep the accounts open.

9. Lowering your credit limits
Many people have fallen into this dilemma, thinking they are making themselves look more responsible by keeping the range of what they can actually borrow within their ability to pay. This will lower your 'credit available' ratio and lower your overall credit score. Whatever you can show as 'available' should stay available. Meaning, don't use it and don't get rid of it.

8. Applying for multiple cards
Maybe you thought you would juggle credit cards to take advantage of the 0% interest debt transfer. You get these offers in the mail and think, 'Wow, I can transfer my debt off that high interest card to this one and not pay interest for X number of months.' But are you looking for a 1-time way to make headway on paying off your debt? Or are you looking for a way to juggle your debt? Applying for multiple credit cards will lower your credit worthiness, and raise your interest rate. You will pay more in the long run.

7. Using your home equity for living expenses
If you are taking out equity to pay off credit cards and then running them up again, you are in a losing cycle that will eventually leave you with nothing but debt. First, if you can not afford your living expenses, you need to cut somewhere; or earn more to get in balance. If you are using home equity it should be for something that ads value to your home like a new kitchen, roof or bathroom; or to your earning ability, like a college degree. Otherwise you are literally spending the home right out from under yourself.

6. Missing payments
When you don't pay an account for 30 days, 60 days, 90 days, it gets reported as a missed payment to the credit agencies. These can severely lower your credit score and stay on your record for seven years. Get on a schedule and pay the bills on time. Pay automatically online if you can, but check to be sure the payments went through.

5. Not checking your credit reports for errors
Creditors make errors and can falsely report a negative item on your credit that really belongs to someone else. Additionally, identity theft is on the rise and you never know who may be using and ruining your credit. One of the best ways to protect yourself from this is to check your credit report regularly and look for any errors or open accounts you didn't authorize. Dispute the errors and notify authorities if your identity has been stolen!

4. Disputing charges and not paying the creditor
Never stop paying and ignore the creditor no matter now small the amount owed. Your credit score will drop 100 points if you do this. Instead, request an investigation and go through the dispute process. Keep written proof and go to small claims court if you have to but don't fail to pay. This is death to your credit score.

3. Settling your debts for less than you owe
Sometimes you can negotiate your debt for pennies on the dollar. This goes on your credit report as a 'settlement' and is understood to mean you didn't pay what was owed in full. This will lower your score and will stay with you for seven years.

2. Falling into a Debt Consolidation or Debt Negotiation Scam
Fraudulent companies will collect your payments and not pay the creditors, leaving you in worse condition than before. Most will require that you sign a contract that will put up your house for collateral. Check for high or hidden fees and escalating interest rates through out the terms of the contract. Scam artists are expert at what they do.

1. Using a debt repair service
Don't use these services. There are legitimate ways to repair your credit by clearing up errors, paying down debt, making payments on time, etc. At best these take several months to raise your score 50-100 points and more over time. You can do these things yourself. Most debt repair services promise to clear your credit or raise it to unrealistic levels with illegal methods such as getting a new social security number or borrowing someone elses credit to raise yours. This is illegal.

Instead, work with a non-profit credit counseling company. Don't pay for these services. There are many non-profit companies that are legitimate and free. They will help you get your credit card interest rates lowered and discuss strategies for credit repair with you. Check the National Foundation for Credit Counseling (nfcc.org) for resources.