Talking Points for Customers on Credit Pitfalls

NEW YORK — The importance of a good credit score cannot be overstated. Adults who handle credit responsibly may save tens of thousands of dollars in interest charges over the course of their lives, as a strong credit history helps to elevate credit scores. The higher an applicant's credit score, the more favorable loan terms for big-ticket items like vehicles and homes will be.

Though the significance of a strong credit history is a lesson in financial literacy emphasized to many people as early as adolescence, it's still easy to make some mistakes along the way. Many people's first encounter with credit comes around the age of 18, a point in time when young men and women may not recognize the gravity of their financial decisions. That makes it easy to fall into some bad habits that can unfortunately have a long-term, negative impact on individuals' financial futures. The following are some common credit missteps that consumers can look to avoid as they seek to build strong credit histories.

Missed payments: The credit reporting agency Equifax notes that even a single late or missed payment can lower a person's credit score. Though it's always best to set up automatic payments so no payment is ever missed, those who haven't taken advantage of that capability who miss a payment should know that it generally takes 30 days for a missed payment to affect a credit score. If you simply forget to make a payment, Equifax indicates that some lenders and creditors may not even report a missed payment if a full payment is made within 30 days of the initial due date. If you missed a payment because you can't afford to pay off the balance, then chances are you're committing another common misstep.

Over-reliance on credit: Utilizing credit too much is another common mistake that can quickly land consumers in debt. Resist using credit to finance unnecessary expenditures, like dining out or a night of entertainment. Only use credit to make purchases you know you can afford to pay off in full come your monthly due date. Credit utilization ratio is another metric used to determine credit score, and it refers to the percentage of your overall credit availability you use each month. The financial experts at Chase suggest a good credit utilization ratio is 30% or less. If you're routinely maxing out your credit card(s) and can't afford to pay the balance in full each month, then your utilization ratio might be around 100% and might even be higher once interest charges are factored in. A high balance on an existing card too often compels young consumers to make another costly misstep.

Opening too many credit accounts: It's hard to turn down what feels like "free" money, and many consumers new to credit might open new credit cards, particularly if a current account has a high balance. Too many credit cards can land consumers in considerable amounts of debt. Equifax notes it's generally recommended that consumers have no more than three credit cards, but some consumers who struggle to make payments each month might be better off with just one card.

Some common missteps can make it easy to fall into credit card debt, which can adversely affect consumers' credit scores. Avoiding those missteps can set borrowers up for a lifetime of financial freedom.

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