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April 17, 2024

By Tracy Scott

There are exceptions to almost every rule. However, when an action is repeated it’s no longer an exception – it’s a habit. Certain credit habits can damage your financial health by keeping you in debt and diverting money away from your spending plan. These habits can also keep you from reaching your financial goals.

Get back on track by first identifying your bad credit habits. Next, create a new routine that helps break those habits. Use one of our suggested alternative habits or select a different one based on your particular situation. Replace old, credit-damaging habits with new ones and you’ll soon be on a path to improved financial health.

Damaging Habit #1: You treat your credit card like a free ticket to a better lifestyle.

Additional buying power is tempting. A new pair of shoes, the latest electronic device, or a weekend getaway are all purchases that you’ve wanted to make but didn’t have the money to buy before now. But, you received your new credit card in the mail yesterday. It has a $5000 credit limit, which is enough to pay for these splurges plus a few more – no savings required.

Using your card to make purchases that don’t fit your spending plan is a recipe for keeping you in credit card debt.

Alternative habit: Save for your splurges instead. Determine how much money you’ll need for your purchase, then decide how much you can place in a separate savings account each month to help you reach your goal.

Damaging Habit #2: Your spending plan doesn’t include a credit card category.

If your credit card payment is missing from your spending plan, add it today. Keeping an accurate representation of your expenses will help you avoid overspending in other categories and possibly motivate you to eliminate credit card debt as soon as possible.

Alternative habit: Create a credit card category in your monthly spending plan and review it before swiping your card. Treat your credit card as cash. If you don’t have enough money to pay off your balance each month then reconsider making the purchase.

Damaging Habit #3: You only make minimum monthly payments.

Do you have dreams of an early retirement, buying a home, or taking a Caribbean cruise? Regardless of your financial dreams, funding them becomes challenging if you carry credit card debt for months or years. Compounding interest makes it harder to make a dent in your debt when you only make minimum payments. Less and less of your minimum payment will go towards the principal amount as your account balance increases.

Alternative habit: Pay off your credit card balance each month to keep your credit in good shape.

Damaging Habit #4: You make payments after the due date.

Your ability to make payments on time makes up 35% of your credit score. Lenders and creditors use your credit scores to assign the best interest rates and terms on loans and other credit-based products. Missing payments is one of the quickest ways to send your credit score in the wrong direction.

Alternative habit: Set up automatic payments to decrease the likelihood of missing payments.

Damaging Habit #5: Your account balance routinely stays at or near the credit limit.

If you carry a balance on your credit card, keep it low. Not only is paying bills on time critical to your financial health but keeping your account balance below 50% can also work in your favor. The amount of credit you’re using relative to your credit limit is known as credit utilization. The lower you can keep your credit balance, the better your credit score will likely appear. Credit experts recommend keeping your credit utilization below 30% since lenders and creditors see higher credit usage as an indication of higher credit risk.

Alternative habit: If you cannot pay off your credit card each month, reduce your balance as quickly as possible. Avoid charging up to your credit limit simply because you can.

Damaging Habit #6: You are dismissing unusual activity on your account.

Even if you make payments on time and keep your account balance low, ignoring your credit history report can mean trouble for your financial health. Check your credit at least annually to ensure correct information is contained in your report at each of the major credit bureaus: EquifaxExperian, and TransUnion. Visit AnnualCreditReport.com to request a copy of your free credit report.

Alternative habit: Sign up for transaction alerts with your credit card issuer to help prevent or stop fraudulent activity in its tracks. Most alerts can be customized based on your needs. Also, review your credit card transactions and statements for accuracy so you can identify questionable activity before it even hits your credit report.

Damaging credit habits can be hard to break, but it can be done. When you incorporate an alternative habit, your new routine becomes second nature, and the benefits of a healthy financial life are priceless. The rewards of an improved credit score, less financial stress, and the ability to achieve your financial goals is worth the effort.