National Get Smart About Credit Day occurs this week, and takes place annually on the third Thursday of October. While it's not a federal holiday, in some ways it should be.
For every adult in America, your credit is an enormously important factor in your financial health and well-being. Your credit rating affects everything from your ability to get a job to your chances of getting approved for a mortgage or an apartment rental.
The American Bankers Association Education Foundation launched National Get Smart About Credit Day back in 2003 in order to highlight the need to teach youth and young adults about the importance of good credit habits. The idea is that if we teach people the steps to healthy credit at an early age, they're more likely to carry those positive credit behaviors throughout their adult years.
So in honor of National Get Smart About Credit Day, here are four bad credit behaviors to avoid.
1. Over-using your credit cards
Running up too much debt on your credit card doesn't just lead to extra interest payments, it also negatively impacts your credit scores. Under most credit scoring models, including the FICO credit score and the VantageScore, the amount of debt you carry on your credit cards is a big factor in the calculation of your credit score.
(Related Reading: What is the VantageScore and How Is it Different From The FICO Score?)
To avoid lowering your credit score, never max out your credit cards. If possible, don't charge more than 25% to 30% of your credit card limits. And to have the highest possible credit scores (i.e. scores of 760 to 850 points), limit your credit card balances to less than 10% of your available credit limits.
2. Co-signing for someone else's loan
The problem with co-signing a loan is two-fold. First, you could wind up having a personal falling out with a relative or friend if they don’t repay a loan, or repay you as agreed. Additionally, loans that you’ve co-signed for can negatively impact you in multiple ways.
If the primary borrower is late on the loan or defaults on it altogether, you're on the hook financially, and from a credit standpoint. That late payment or default makes you responsible for the debt — and you take a hit to your credit score as well.
Furthermore, even if the person for whom you’ve co-signed does repay the loan, your ability to get future credit could be diminished. That's because if you later need a loan – say, to buy a car or a home – lenders will look at your overall debt-to-income ratio, including loans for which you are a co-borrower or co-signer. If your debts are deemed to high, your loan could be denied.
3. Paying bills late
The number one factor in your credit score is how well you pay your bills. So anytime you are 30 days or more late in paying a credit obligation, such as a credit card bill or a mortgage, that late payment lowers your credit score. Do yourself a huge credit favor; avoid paying any bills late. Even if you can only afford to make minimum payments, that's better than having a late payment on your credit report.
4. Ignoring your credit health
If you've had credit problems or credit setbacks in the past, be honest for a moment. Have you ever just ignored your credit report or maybe put off getting your credit score because you were scared to see how low that score might be, or you just didn't want to see the damage on your credit report? Well, putting your head in the sand and acting like an ostrich isn't going to solve the problem. Only action will.
So no more procrastinating. Just go online to www.annualcreditreport.com and get your free credit reports. Under federal law, you can visit the annualcreditreport.com website and get the free credit reports you're entitled to receive once every 12 months from Equifax, Experian and TransUnion, which are the three main credit bureaus.
You should also take a peek at your credit scores. If you don't have a credit card that provides your credit scores free of charge, you may have to pay for your credit scores. But it's worth it to know where you stand.
Alternatively, if you don’t want to pay, MyFICO offers a credit score estimator and calculator to help you estimate your FICO credit score. Credit Karma also offers a credit simulator, which is powered by TransUnion. Either tool will give you a very good indication of your credit score range in about two minutes.
Paying attention to your credit rating and avoiding bad credit behaviors will go a long way toward boosting your credit scores and improving your overall credit health – on National Get Smart About Credit Day, and all year long.