Avoid These Credit Card Payment Mistakes for a Good Credit Score
When we talk about young adults and debt, it’s almost always a conversation that involves student loans. But beyond student loans, many young people also struggle with credit card payment mistakes and managing debt.
When it comes to credit card payment mistakes, many young adults might wrongly assume that they are taking the right steps to build a positive credit history. They might even think that paying their credit card bill each month is enough to maintain a decent credit score. Unfortunately, young adults might make big credit card bill-paying mistakes that could cause their score to drop. Here are mistakes everyone must avoid, along with a few tips to get a good credit score:
1. Paying Late
As a young adult, you might think that paying your credit card bill late is better than not paying it at all. While that’s true, don’t fool yourself into thinking that you’re not hurting yourself financially. If you make a late payment, expect to get charged a fee for being late or missing the payment. These fees, which range from $15-$35, can add up if you are consistently late with your payments. If you’re delinquent for a long period of time, not only will you be penalized with late fees, but your issuer might also raise your interest rate.
You don’t ever want to be late making a payment, but if you’re going to be late, don’t be more than 30 days late. Why? Because the late payment will also be added to your credit report if you’re more than 30 days late -- and it will stay there for seven years.
If you’re delinquent on your credit card bill for 30 days and have a FICO score of 680, your score could drop by 80 points. If you’ve got a score of 780, it could drop more than 100 points, according to FICO. If you're late on making payments for 60-90 days, your card issuer might even shut your account down.
Credit Score Ranges and Quality
|Credit Score Ranges||Credit Quality||Effect on Ability to Obtain Loans|
|300-559||Very Bad||Extremely difficult to obtain traditional loans and line of credit. Advised to use secured credit cards and loans to help rebuild credit.|
|560-649||Bad||May be able to qualify for some loans and lines of credit, but the interest rates are likely to be high.|
|650-699||Average/Fair||Eligible for many traditional loans, but the interest rates and terms may not be the best.|
|700-749||Good||Valuable benefits come in the form of loans and lines of credit with comprehensive perks and low interest rates.|
|750-850||Excellent||Qualify easily for most loans and lines of credit with low interest rates and favorable terms.|
There are a lot of factors that go into determining how much a late payment will hurt your credit score -- outstanding balance on the account, number of other accounts on file, length of credit history, etc. -- but understand that one slip up could cause a big drop in your score.
Avoid paying your credit card bill late by signing up for automatic bill pay or sending yourself bill alerts.
2. Skipping A Payment
You’re young, so you might decide to make a large purchase or book a flight somewhere, skipping out on paying your credit card bill for the month. Or perhaps money is tight and you think you can miss out on paying your credit card bill one month. Missing a payment will hurt your credit history. What you might consider a temporary reprieve, credit card bureaus will see as irresponsibility and a sign of financial difficulty.
Your payment history accounts for 35 percent of your credit score, so even just one credit card bill payment mistake can hurt you.
FICO Credit Score Factors and Their Percentages
|FICO credit score factors||Percentage weight on credit score:||What it means:|
|Payment history||35%||Your track record when it comes to making (at least) the minimum payment by the due date.|
|Amounts owed||30%||How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.|
|Length of credit history||15%||The average age of your active credit lines. Longer histories tend to show responsibility with credit.|
|Credit mix||10%||The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)|
|New credit||10%||The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily.|
Skipping payments is one of the quickest ways to damage your credit score. And just as with paying late, skipping a payment might be on your record for seven years and could cost you up to $35 in late payment fees. In addition, if you participate in a credit card rewards program, you might not be able to take advantage of the rewards.
Avoid skipping a payment by using a money management service like Mint and making paying your credit card off a priority. Sign up for online bill pay and schedule payments so the funds are automatically withdrawn from your account. Remember that every single missed payment will harm your credit score.
3. Not making the minimum payment
While paying your credit card bill, you have to at least pay the minimum amount due. Truthfully, you should be paying more than the minimum amount due -- particularly if you have a high-interest credit card -- otherwise you’ll be stuck paying off interest forever. Consider this: if you have $10,000 in debt on a card that has 15 percent interest and you only make the minimum payment of 2 percent on the balance, you will be paying off more than $15,000 in interest. Moreover, you’ll be making payments for more than 30 years.
You might think that paying off a little of the bill is better than not paying any of it of at all. However, you issuer might not see things the same way. Even if you pay only a little less than the minimum, some credit card issuers may report it as a missed payment. This will bring your credit score down and make it more difficult for you to qualify for credit in the future.
Avoid not making the minimum payment on your bill by including credit card bill payments in your monthly budget.
4. Maxing out your card
When you’re young and new to the workforce, chances are high that you won’t be earning a lot of money. You’ve got a whole new set of expenses to think about -- your student loan bills -- and the usual things every young adult pays off, like rent, utilities, phone bill, cable, and a car note (plus insurance) if you own a vehicle. You might not have much money left at the end of the month, so you use your credit card and charge the amount you just paid off. You might even get close to maxing out the card.
Using all or most of your credit line will hurt your credit score. In fact, 30 percent of your score is based on how much available credit you are using. The closer you get to maxing out your credit card, the more you will hurt your credit score. High credit utilization signals to lenders that you might be a financial risk, which will affect your ability to get loans. It’s also dangerous because you risk exceeding your credit limit, which leads to you paying an over-limit fee.
Avoid maxing out your card by following this rule: if you can't pay for it with available funds, don't buy it. Aim to keep your balance low, which can actually help increase your credit score.
Paying bills and tips to get a good credit score
The easiest way to ensure that you pay your credit card bill each month is to use the automatic bill pay payment system set up by your credit card issuer. If you prefer to have all your bills organized in one place, you might consider using a website like Mint or an alternative.
If you’ve got more than one credit card, you must keep current on paying each bill every month. You also want to make sure you don’t carry high balances across several cards, which indicates that you’re at risk to default and will bring your score down.
If you are having trouble making payments -- perhaps you lost a job or have to take on a new expense -- you can also try to make special payment arrangements with your credit card issuer. You will have to contact your credit card company and see if you can work out an agreement. There’s no guarantee that you will be able to make a special arrangement, but many lenders will work with customers on alternative payment options or create a payment plan that works for both of you.
Always be on time
The most important thing you can do to improve your credit score is to pay your bills -- credit card and otherwise -- on time. Delinquent payments can have a huge negative impact on your score. Also, keep your balances low and aim to pay off debt rather than moving it around.
Lastly, don't apply and open new accounts just because you can. Applications for credit will show up as inquires on your account, which may indicate to lenders that you could be taking on new debt. Plus, opening a ton of accounts won't improve your credit score if you can't afford to pay off the debt.
Unfortunately, if your score is low because you made one or a few of these common bill paying mistakes, there isn't a quick fix. Just pay your bills on time and wait. Time is your friend in this instance. Follow the aforementioned tips for a good credit score and you will see it rise over time.