Your credit score has a direct impact on your ability to borrow money. A higher credit score makes you more likely to get approved for loans or credit cards, and it can also set you up with more affordable borrowing rates. But if you have poor credit, you might not only struggle to get approved for a loan, but also get stuck with an exorbitant interest rate once a lender says yes.
Experian, one of the three credit bureaus, defines poor credit as a score of 579 or less (the lowest your score can go is 300). And sometimes, people wind up with poor credit due to a series of unfortunate circumstances, like a string of unemployment or health issues that cause them to rack up bills and lose out on income.
But you need to be aware of the habits that could result in a credit score that works against you. Here are four habits of people with poor credit — and how to break them.
1. They don’t pay their bills on time
Your payment history carries more weight than any other factor when calculating a credit score. But people who are routinely late with bills risk severe credit score damage.
To avoid being late with your bills, set up a budget to make sure you can stay on top of your recurring bills. Also, put bills on autopay if possible so you don’t fall behind due to sheer forgetfulness.
If the reason you’re commonly late paying bills is a lack of money, do an overhaul of your budget and slash some expenses temporarily until your income increases. That could mean getting a roommate or dumping a car if you can get by with public transportation. Or, if cutting back on spending isn’t an option, boost your income with a side job until you have a better handle on your expenses.
2. They only make their minimum credit card payments
Credit card issuers give you the flexibility to only make your minimum payments each month. If you stick to that plan, you won’t hurt your credit score from a payment history standpoint. But your credit score could get stuck in a rut because your utilization is high.
Your credit utilization ratio measures how much of your revolving credit you’re using at once. If you only make your minimum credit card payments each month, your utilization likely won’t drop. So try your best to pay down some credit card debt, and then, from there on out, aim to pay more than your minimum each month. You’ll also save money on interest.
3. They close credit card accounts as soon as they’re done with them
Closing credit card accounts could hurt your credit score in a couple of ways. It could lower the average age of your accounts (in the case of closing a card you’ve had for a long time), and it could lower your credit utilization ratio.
Remember, that ratio compares your outstanding credit card debt to your total credit limit. If you owe $5,000 on a $10,000 limit, that’s 50% utilization, which isn’t great for your credit score to begin with. But if you cancel an old credit card with a $2,000 limit and reduce your total limit to $8,000, that’ll drive your utilization up to 62.5%.
Instead of closing old credit card accounts, keep the ones you rarely use open and active with a small recurring charge each month. However, you likely don’t want to hang onto credit cards you don’t use that charge an expensive annual fee. In that case, you could ask the issuer to downgrade an existing card to one without a fee. If that’s not possible, you could cancel the old card and apply to open a new one that doesn’t charge an annual fee.
Your credit score might take a small hit when you open a new credit card account. But that hit might be much smaller than the hit you take due to an increase in your credit utilization.
Plus, if you shop around for a new credit card with a generous sign-up bonus, you can use that extra cash to pay off some of your existing balances. Click here for a list of the best credit card sign-up bonuses available now.
4. They never check their credit report
You might assume that you don’t need to check your credit report since it contains information you can’t change anyway. Not so.
It’s not unheard of for credit reports to contain errors. And some of those errors may be dragging your credit score down needlessly. If one of the credit bureaus has you flagged for being delinquent on a loan when you’re actually on top of your payments, that’s the sort of mistake you’ll want to correct immediately.
And you should know that the credit bureaus are required to investigate any disputes you make. So the information your credit report contains isn’t necessarily set in stone.
As a general practice, it’s a good idea to check your credit report from each reporting bureau — Experian, Equifax, and TransUnion — a few times a year. You can either pull all three reports at the same time every three months, or you can review one credit report a month from a different bureau on a rotating basis.
Poor credit could get in the way of your ability to borrow money affordably. That could make it harder to buy a car, own a house, or even finance a cellphone purchase. It pays to do what you can to get your credit score into better shape. And a big part of that means avoiding these harmful habits.
