5 credit mistakes that can come back to bite you

This item is reprinted with permission from Nerdwallet.

Some credit errors are much worse than others. The little ones, like paying a credit card bill a day late, can cost you a penalty fee, but that’s a relatively minor irritation – it’s not going to come between you and a mortgage. Other seemingly minor slippages can lead to disasters in their own right.

What makes a credit error haunt you?

Some things can be reversed quickly. The accumulation of credit card bills can lower your credit score, for example, because the part of your credit limits that you use is weighed heavily in the credit rating. But when you pay off the debt, the damage goes away as the lower balances are reported to the three major credit bureaus, Equifax EFX,
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EXPGY EXPGY,
+ 1.25%
and TransUnion. TRU,
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Mistakes that have long-term ripple effects are the most painful, according to credit expert John Ulzheimer. A late payment, for example, can be sent to a collection agency and then perhaps turn into a repossession or bankruptcy. These damage your credit and stay on your credit report for years. Likewise, co-signing a loan for someone who will later be unable to pay can cripple your finances for a long time.

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Common mistakes that can hurt your finances

Missing a payment: A little late payment may cost you a penalty fee, but your credit score won’t suffer because creditors can’t report your account past due until it’s 30 days past due. If you have a high score, being late for 30 days can take your score up to 100 points – and that stays on your credit report for seven years. The damage gets worse if you allow the account to grow to 60 days past due, 90 days past due or more. Your score may recover, but it will take time. It may help to catch up with this account and keep all other payments up to date and balances low.

Raise the retirement funds to pay off the debt: Most people don’t want to file for bankruptcy. Nearly half of Americans say they would not file a case no matter how much credit card debt they have, according to a recent study ordered by NerdWallet. Bankruptcy attorney Roderick H. Martin of Marietta, Ga., Said some of his clients have drawn down – or even drained – their retirement savings in a desperate attempt to stay afloat. This often only delays the inevitable – “then they turn around and file for bankruptcy,” he says. Retirement savings are usually protected in the event of bankruptcy, but the money already withdrawn cannot be recovered.

Co-sign a loan: Aaron Smith, a financial planner in Glen Allen, Va., Says co-signing so that a friend or relative can get credit is often a mistake. “My personal and professional opinion is that if they can’t get it on their own, there must be some problem,” he says. If the primary borrower doesn’t pay as agreed, it can leave both your relationship and your credit in tatters. Even if the borrower repays as agreed, staying on the loan can limit your borrowing capacity. Before you co-sign, ask if you can be taken off the loan at some point.

Sometimes doing nothing is the mistake

We may think that we are too busy to worry about the fine print or financial tasks. Either one can come back and bite us.

Don’t check your credit: “I think checking your credit is like going to your dentist for a cleaning,” says Elaine King, certified financial planner and founder of the Family and Money Matters Institute. “You have to get into the habit of doing it. If you wait too long there may be some rotten stuff out there.

A credit report is not an exciting read; it is a summary of your past credit management. But ‘boring’ is what you want – anything you didn’t expect to see is worth investigating in case it’s a mistake or a sign of fraud. Until April 2021, you can get a free credit report every week from the three major credit bureaus using AnnualCreditReport.com. Plan to check in at least once a year, and more often is better.

Ignore the details: Not knowing your credit card interest rates or when a 0% interest rate ends can cost you money.

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Knowing the interest rates can tell you which card to use when paying for a new transmission and need to keep that balance for a while, for example. Knowing when a teaser rate ends can help you make sure you’ve paid off the balance by then. It is important to read the fine print. Some cards, mainly store cards, charge deferred interest if there is a balance left at the end of the introductory period. This means that the “savings” from the teaser rate are added to your balance, eliminating any benefits.

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Bev O’Shea is a writer at NerdWallet. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.

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