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5 Ways You’re Accidentally Wrecking Your Credit

It’s one thing to knowingly make decisions that hurt your credit score. We’ve all been there, and sometimes tough decisions must be made. But it’s an entirely different situation to accidentally wreck your credit. After your debt program is complete pay attention to the following to help maintain a good credit score.

In some cases, we make decisions without realizing the impact on our credit. In other cases we may know that certain decisions can hurt our score, but we don’t appreciate the severity of the impact. Either way, maintaining good credit requires more than casual attention.

It is entirely possible that you could be accidentally wrecking your credit, and here are some of the ways that you could be doing just that.

1. Not Paying Attention to Your Credit Balances

Good credit is about more than just paying bills on time. About 30% of your credit score is based on your amount of debt, which includes your credit utilization. That’s the ratio of how much you owe on your credit lines divided by the total credit limit of those lines. For example, if you have total credit lines of $40,000, and you have a total outstanding balance of $10,000, your credit utilization ratio is 25% ($10,000 divided by $40,000).

If that ratio exceeds 30%, it can have a negative impact on your credit score. If you are casual about your credit balances, they can slowly creep up to 40%, 50%, 60% or more. At that point, you may see your credit scores begin to sink.

2. Closing Accounts

A lot of people make it a habit of closing out any credit cards that they pay off. From a credit perspective, however, this can have a negative impact. Though it seems counter-intuitive, a paid in full line of credit or credit card is a positive contributor to your credit score, even if you stopped using the account.
This brings us back to credit utilization. If you pay off a credit card that has a line of $5,000, that available credit is contributing to the total amount of credit you have available. That will improve your credit utilization ratio. Closing the card will lower your available credit, increase your overall credit utilization, and potentially lower your credit score.

3. Co-Signing Loans

Co-signing loans is another area where people are often very casual. They often assume that they are just doing a good deed to help a friend or family member, and may even mistakenly believe that it’s simply a one-time event.

But when you co-sign a loan, you will be involved in that loan and that loan will be on your credit report until it is fully paid. In the event that the primary borrower makes a late payment, this will have an impact on your credit score. Worse, should the loan go into default, this will also show up on your credit.

4. Applying for Too Many Lines of Credit

If you have good credit, it’s likely that you are getting bombarded with credit offers in the mail on a weekly basis. If you are in the habit of applying for the better ones every month or so, you could be unknowingly hurting your credit.
Credit inquiries account for 10% of your overall credit score. While this is the least significant factor, these hard pulls — as they are called — can ding your credit. Consider the impact these inquiries can have the next time you consider a 0% credit card offer or bonus miles sign-up deal.

5. Not Monitoring Your Credit Scores

One of the best ways to know if you are hurting your credit is by monitoring your credit scores. Credit scores change on at least a monthly basis, but typically stay within a tight range. A significant drop in your scores, say more than 25 or 30 points, is an indication that something is wrong. You won’t know about the drop, however, unless you are paying attention to your credit scores on a regular basis.
A significant drop in your score could be an indication that your credit utilization ratio is getting too high. It can also indicate an unsuspected late payment. Errors are also possible when it comes to credit. And at the extreme, a big drop in your credit score could be an indication that you are the victim of identity theft.

You won’t know any of these unless you are monitoring your credit scores on a regular basis. Unfortunately, ignorance is not bliss when it comes to your credit. You shouldn’t obsess about it, but at the same time, you should never be too casual about it, either. Bad things can happen when you’re not paying attention.

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The 5 Biggest Reasons My Clients Fall Into Debt

In the more than 15 years of experience working in the debt industry, I’ve heard every story under the sun about how someone fell into debt. While there are times when people fall into debt for unavoidable reasons, I do notice a lot of people fall into debt for the same reasons. So in order to help keep you from making the same mistakes, here are the five biggest reasons I’ve seen people fall into debt.

1. Treating Credit Like Cash
Many of my clients have a tendency to treat their credit cards like an extension of their bank account. They max out their credit cards without taking into consideration the impact it’s having on their Credit Scores and how much more they’re paying over time in interest. This sort of behavior could really put you in a jam!

My solution? Stick to a debit card or keep yourself honest with only one or two low-limit credit cards. I also advise them to assign specific “jobs” to their cards, to keep them from overspending. Budgeting for “fun” purchases that you pay for with cash or a debit card could help keep you from overspending, while reserving your credit cards to handle recurring bills and online subscriptions — in amounts you can pay in full each month — is a better way to manage them. Keep in mind, carrying a balance that is more than 30% of your credit limit can have a negative impact on your credit scores.

2. Trying to Keep Up With the Joneses

True wealth is having a high net worth, not having a lot of stuff. A lot of my clients fall into debt because they believe in order to seem financially successful they need to SPEND their money on elaborate, luxurious and unnecessary things to simply keep up with neighbors. Trying to keep up with appearances and maintain a lifestyle you can’t afford is one of the quickest ways to fall into debt.
So what do I tell my clients? I explain to them that the neighbors they’re so concerned with, the ones with the fancy cars, are most likely in debt themselves! You can never know who owes money and how much, so it’s important to not judge by appearances. Spend only on things you can afford, put money away and you’ll be the one people want to keep up with.

3. Not Separating Needs From Wants

You want to have your priorities straight, especially when it comes to money. Not having a clear understanding of the things you need as opposed to the things you want could result in a lot of unnecessary spending and, in turn, debt.
Whenever my clients seem to be having difficulty understanding the difference between needs and wants, I tell them to write everything down. Making a simple list of needs, wants and even a category for both can help you identify and prioritize your spending goals. Keeping a tight list can help you attend to the things you need while also setting aside enough money to get the things you want.

4. Financial Illiteracy

Some people just don’t know how money works, how to budget or how to manage personal finances. Whether it’s because they were never properly educated or simply hated economics in school, financial illiteracy can lead anyone into debt.
That said, it’s never too late to learn! I always suggest that my clients take some time and educate themselves on basic personal finance. With the vast number of great books, blogs, podcasts and websites out there dedicated to personal finance and financial literacy, you’re sure to find a way to learn about money and, subsequently, keep yourself out of debt.

5. Hoping for the Best, But Not Preparing for the Worst

Without an emergency fund, you’re leaving yourself exposed to all sorts of financial woes. I understand that you cannot prepare for every situation, but having a safety net of funds in the bank can help you sleep better and keep you from getting into debt when the unexpected happens.

A lot of my clients find themselves falling into debt when disaster strikes because they simply didn’t save enough. I suggest they build a budget so they can see how to save to their maximum potential. Once they’ve set aside enough money, they start to understand the benefits of keeping money in the bank. I constantly have clients telling me that budgeting has given them financial peace of mind.

When it comes to staying out of debt, it really boils down to paying attention. More often than not, people find themselves up to their ears in debt because they ignore their statements, are overspending because they don’t budget, and getting caught with unmanageable expenses because they didn’t save. Take the time to sit down and review your finances. Learn how much you need to save for emergencies and long-term goals and make it a habit of continually setting money aside. The more frequently you do a checkup on your finances, and the more frequently you hold yourself accountable, the less chance you’ll have of falling into debt.

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Why Your Tax Refund Is Ideal for Paying Credit Card Debt

If you’ve promised yourself that you want to pay off your credit card debt “when you have more money,” now’s your chance. The Internal Revenue Service estimates that 70% of taxpayers will get refunds this year. Last year, the average refund was $2,860, according to the IRS.

You have taken a huge step enrolling in our debt negotiation program, but the program can only work as fast as you can save funds. Using even a portion of your return to go towards your program will greatly improve the speed in which we are able to settle your account, with almost no effort on your part. In a 2016 National Retail Federation survey, about 39% of American adults said they planned to use their refund to pay down debt, why shouldn’t you do the same?

If paying off your debt faster is your goal, then you know what to do but you may want to use a portion of your refund elsewhere if:
You don’t have an emergency fund. Sock away at least $500 in your bank account before tackling your credit card debt.
This is important to have a safety net in the event that something out of the ordinary comes up.
Since your credit card debt is gnawing away at your monthly budget, here’s why tackling it now is your best call.

You’ll be out of debt faster

Being out of debt faster will get you out of the program faster. And you will no longer have the program payment monthly and will have that additional money every month to spend on other things or activities.

It could boost your credit

“Amounts owed” — that is, how high your balances are — accounts for 30% of your FICO score and is a “highly influential” factor in your VantageScore, Credit Utilization Ratio, or the percentage of available credit you’re using, is a major factor in amounts owed. As a rule of thumb, it’s a good idea to keep your balances below 30% of your credit limit at all times. The lower you can keep your balances, the better. Settling the remaining accounts in your program will greatly help with your Debt to Income Ratio.

Applying your refund to your credit card debt can help you reduce both your overall debt and your credit utilization ratio quickly. This can help your credit score, making it easier to qualify for more affordable credit products and even potentially helping you save on car insurance.

It’s a painless path to a fresh start

Sometimes, the most difficult thing about paying down debt is the “paying” part.
Because of a psychological effect called loss aversion, losses can loom larger in our minds than gains. That’s why it’s painful to see money leave your bank account — even if you know those extra payments are helping you in the long run.

When you pay down your credit card debt with your tax refund check, though, you get to pay down that credit card debt with “found money,” instead dipping into your savings. That makes it a little less painful.