We also gain education through school systems designed to impart academic knowledge, develop critical thinking skills and prepare us for college and a career beyond. What many young adults never learn, however, is how to handle money. Perhaps you know how to balance a checkbook or create a budget, but most young adults enter the working world with a financial education that is woefully lacking.
Is it any surprise, then, that so many of us end up amassing debt, living paycheck-to-paycheck, and ruining our credit scores in the process? Forget about investing and planning for retirement – many adults are having trouble keeping their heads above water in the here and now!
As always, what you know can help you to make the most informed decisions. Here are just a few things you should know about that could ruin your credit in a hurry.
1. Neglect
So you’re going along just fine, paying your bills and minding your business. What could possibly be wrong with your credit score? The problem is, if you’re not paying attention you don’t know what’s going on with your credit.
Suppose there are black marks from old debts that you’ve paid but payments were never reported? Or what if there are erroneous black marks for missteps you never even made? Worst of all, what if you’ve been the victim of a stolen identity and someone is racking up debt in your name that you don’t know about?
Pundits advise everyone to check their credit score at least once a year, and there are several resources that will send you your credit report for free annually, so there’s really no reason not to check it out. You could catch snafus and fraudulent activity in plenty of time to address issues and keep your credit report clean and your score high.
The last thing you want is to discover that your credit has unknowingly taken a nose dive when you apply for a car or home loan. Considering such problems could take weeks, months, or even years to clear up, it’s best to be aware of where you stand with your credit instead of neglecting it. It’s easy and it’s free, so what are you waiting for?
2. Late or Missed Payments
Most utilities and credit lenders (among others) report to credit reporting agencies, and they’re a lot more likely to report your shortcomings than your successes, which is to say, when you’re late making payments or you miss them altogether, you shouldn’t be shocked to see a ding on your credit score as a result.
The absolute worst thing you can do is allow these missed payments to go to collections. Once this happens your credit score will take a serious hit, and recovering can be extremely difficult, even when you’ve cleared up the matter with appropriate payments.
Obviously, the best policy is to avoid the situation if at all possible by making payments on time and in full. If you’re unable, at least pay the minimum to avoid penalty and negative reporting. If you simply can’t pay, call your creditors to inform them so that you can make other arrangements, like going on a payment plan, and hopefully gain some leniency that doesn’t include destroying your credit score.
3. Co-signing
This is a major no-no. You may think you’re helping a friend or loved one by co-signing for a loan, but the truth is that you’re much more likely to suffer damage to your credit score as a result.
There’s only two reasons your family members or friends would ask you to co-sign on loans; it’s because they either have bad credit or no credit, making them too big of a risk for a lender to take on alone. You are the insurance policy because of your good credit and solid history of payment.
Unfortunately, you could be viewed by the lending agent as untrusting as the lenders that require a co-signer. More often than not, your family members or friends will continue their bad habits and drag you down with them, affecting your credit rating in the process.
4. Large Credit Card Balances
It’s important to understand the difference between “good” and “bad” debt because one type can help your credit score while the other can definitely cause harm. In the category of good debt, you’ll find mortgages, student loans, and business loans, for example.
These types of debt are considered good because these investments increase value. Mortgage loans are based on tangible assets (real estate) in which you build equity, student loans help you to start a career and increase earning potential, and businesses earn money that can be used to pay off debts. All can help you to build credit.
Credit card debt is another story. It carries only negative value, which impacts your credit score negatively. The more debt you rack up and the longer you carry it, the worse your credit score will suffer. All you need to do is start plugging numbers into a credit score simulator to see how much your credit card debt could affect you.
5. Bankruptcy
You’d have to live under a rock to be unaware of the consequences of bankruptcy to your credit. This black mark remains on your credit report for 7-10 years, during which time it may cause you to be denied for loans or even to lose out on job opportunities. You could forget about major purchases like a home.
In addition, bankruptcy filing may only wipe out a portion of your debt, leaving you with terrible credit and still have debts to repay. All in all, it’s best to avoid bankruptcy by any means.
6. Failure to Negotiate
If you want to improve your credit score, negotiating with creditors could be the key. If you’re having trouble paying debts, a simple phone call could be enough to reduce the amount you owe and/or set up a payment plan you can manage.
Keep in mind that creditors want to recoup costs, even if only in part and even if it takes longer than anticipated. You need to negotiate for terms that you can actually live with if you want to avoid the black marks that can mar your credit for years to come.
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