Credit Plus: Avoiding Credit Mistakes

Al Bingham with Credit Plus talks about four common mistakes not to make.

Transferring Balances

Like most people, you are always looking for ways to reduce your interest charges. You probably know the interest rate charged on each of your loans. If you could reduce your interest rate on a current loan, would you consider that option? If that option would cost you money in the future, would you still consider it?

For example, you may have a credit card with a high interest rate and want to find another credit card who will charge you less interest. You have a credit card with a $3,000 balance, a high interest rate of 18.00% and a monthly payment of $150. You want to find a credit card with a lower interest rate. You apply and are approved for a new credit card with a fixed interest rate at 5.00% for 12 months before it adjusts up to 12.00%. The new credit card lowers your monthly payment to $100 and gives you a $3,500 credit limit. You transfer the $3,000 balance to the new credit card thinking that this will save you interest. Transferring the balance will save you some interest, but there is a downside.

In most situations when you open any account, you raise your credit risk and lower your credit score. You compound that problem further when you borrow an amount that is exceedingly high. In this situation you have a new credit card with a limit of $3,500. You transfer a balance of $3,000 over to the new account creating a high debt ratio of 86%. Opening a new credit card and borrowing extensively against the new line of credit can easily drop your score 40, 50 points or more for the next 12 to 24 months.

You should never be enticed to transfer a balance just to attain a lower interest rate for a short period of time. Your credit score can drop causing you to possibly pay substantially more on future loans and higher insurance premiums, or reduce the possibility of securing a higher paying job. Don’t be enticed into these short term solutions because they can have long term consequences.

If you have a higher interest rate on a credit card, contact the current lender to negotiate a lower rate. If you are unsuccessful, your next best option is to transfer the balance to a fixed rate loan such as a personal loan or even a collateral type loan. There are many other options that are more favorable and will cause less damage to your credit score. Take the time to look around. You could avoid a dramatic and substantial drop to your score.

Purchase Discounts

Another method you can save money is to open a new merchant account from a retail outlet to save yourself 10%, 20% or more from your current purchase. You have a total purchase of $300 and the clerk asks if you want to open a new credit card with them and save 20% off the purchase. You think that you could save yourself $60 from your total purchase. What a deal!

Every consumer is flooded with offers to open a merchant account and save a percentage off the amount of your current purchase. You go to Macey’s, Sears, JC Penney, Home Depot, Kohls or Target. The clerk asks you if you want to open an account with them and save money off your purchase plus finance the rest. You think it would be wise possibly becaues you can save some immediate cash for some upcoming expenses. By opening this account, you can purchase your items and finance it so you don’t have to come up with the cash now. Great deal, right?

Wrong! There are two problems with these accounts. If you open several merchant accounts within a twelve month period, it can easily drop your credit score 100 points within a few days. These accounts add to your credit risk and lower your score.

The second issue that drops your score is the debt-to-credit limit ratio – also referred to as a debt ratio. Often the merchant lender approves your line of credit for the amount of the purchase and nothing more. If your purchase is $750, the lender usually approves you for $750. This gives you a 100% debt ratio on that line of credit account. You have compounded your credit risk and dropped your credit score even more from the new account by borrowing the entire amount. As discussed earlier about transferring balances to new accounts, you are doing the same thing here – opening a new account and having a high debt ratio.

Opening a merchant account can be a valued resource to your credit score if you do it correctly. Spread the number of new accounts out over time. If you are going to use that account for future needs, pay it off within a month or two, but keep the account open. Don’t open a second or third account for at least another year. By following these rules, you can spare a sudden and substantial decline to your credit score for the coming months.

Paying Off Monthly Credit Card Balances

Many consumers think that they are constantly building their credit score when they pay off their credit card each month. You can charge your monthly living expenses to your credit card and pay off the balance before interest charges accrue. As long as you pay off the balance each month you should be building your credit score. This is true to an extent, but there is another issue that can drop your score.

The issue centers on the reporting date and when your credit card account information is reported to each of the three major credit bureaus. You have a $5,000 credit limit on a credit card that you use every month and pay the balance owing before interest accrues. The billing cycle is monthly from the 1st to the 31st with the payment due on the 25th of the following month.

However, the credit cards reporting date to the credit bureaus is the 20th of each month. You charge $3,000 in January and another $2,000 by the 20th of February. Your balance on the February 20th reporting date is $5,000 even though you pay the $3,000 just five days later. This makes your debt ratio or balance to credit limit at 100%. This issue will have a damaging impact to your credit score. Your credit card can show an excessively high balance every month even though you pay off the balance. Remember, a high balance to credit limit on any credit card can hurt your credit score.

There is a viable solution. If you pay the $3,000 before the reporting date on the 20th of February, the balance shows $2,000 or a 40% debt ratio. When you pay your balance every month with your credit card, check the reporting date with the credit card company. Most credit card companies report to the credit bureaus within a week when the payment is due. If you pay before that date instead of the payment due date every month, your score should be consistently higher over the months and years to come.

Auto Purchase

When was the last time you purchased a vehicle? Do you feel that you made the right decision? Are you still making monthly loan payments on that auto purchase? Is the balance you owe more than the value of the vehicle? How many people do you know have a balance on their auto loan which is higher than the value of their vehicle? Unfortunately it happens all too often.

When someone owes more than their vehicle is worth, the chances of default on that auto loans increases because the person cannot sale the car and payoff the loan. As a result, they default on the loan, and any default damages a credit score for up to seven years. If you take some time and review the vehicle and the loan terms before its purchase, you can better prevent being caught in a bad auto loan.

Auto dealerships offer many incentives to sell cars and trucks, but these incentives come with a price. You can end up with a higher interest rate or even owe more than the value of your car. You can make a huge mistake when you purchase a vehicle by failing to recognize important red flags. Remember that dealerships not only make money on the sell of the car to you, they also make money of the loan they arrange for you.

There is a classic conflict of interest. Whenever the salesman arranges the sale of a car or truck, and the financing on that purchase, there should always be a concern. The salesman has a secondary interest to sell you the car: the loan. The higher the salesman can get your monthly payment, the more money the bank pays the dealership for that loan.

For example, you bought a car for $14,000 and had a monthly payment of $350 at the lowest qualified interest rate. If the dealership can increase your monthly payment to $375 by raising your interest rate, the bank will pay the dealership more money for your loan. This is primarily the reason why so many consumers have ended upside down in a car loan – basically, they owe more than what their car or truck is worth.

Before you go to purchase a car, apply for a loan at your local bank or credit union. Once approved, proceed to the dealership and find the best deal for you. If you are interested in a vehicle, find the true value of that vehicle online and through other respected resources to assure that you are not purchasing something that is substantially more than its value. You don’t want to purchase a car valued at $15,000 for $20,000.

You can learn more about avoiding credit mistakes by going to

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