Several years ago, when I wanted to buy a house, I finally started carefully monitoring my credit score. An alarming report informed me that one factor driving down my score was a “lack of diverse credit,” and “no store or gas credit cards” in my file. And I thought minimizing my debt liability was a good thing.
To try to correct the problem, I decided to dive deeper into the world of credit cards. I figured I was responsible enough to add some cards to my wallet without any negative repercussions. I ended up falling down a slippery slope of trouble. While I was extremely responsible fiscally, I fell victim to some dumb mistakes. And by dumb mistakes, I don’t mean spending more than I earned or ignoring credit card bills. I mean silly, avoidable bank errors that ended up hurting my wallet and my credit score.
Watch out for these dumb credit mistakes and confessions so you can avoid the trouble that my friends and I faced.
Confession #1: My Deep, Dark Secret
I had never opened a retail store credit card, and I thought I was just missing out on the great discount offers that cardholders get. But it turned out I was also missing the “diverse credit” that I needed to boost my score. When I opened my Kohl’s credit card, I immediately started benefiting from the 10-30% discount offers. The credit score benefit didn’t come as quickly. At first, I lost about five points because I had taken on more credit liability, but after a few debt-free months, my score went up. I was even featured on AOL’s WalletPop for little-known moves to improve your credit score.
What’s my deep, dark secret? After having the card for about six months and seeing my score rise as I paid at the register or immediately after making a charge, I messed up. I forgot about a charge and missed a payment – by more than thirty days.
Learn from mistakes: There’s a reason you lose points on your credit score when you open a new account. Lenders know people are likely to forget to add a new payment to their bill-paying schedule (or their budget). Don’t fall into their trap. When you’re approved for a new card, immediately set up new reminders to add this bill to your routine. Mark your calendar for your first payment’s due date. Or make a note on one of your longstanding regular monthly bills that tells you to go check on the new account.
Confession #2: Pay Attention to Who’s Behind the Curtain
My late Kohl’s credit card payment had far-reaching ramifications – as dumb mistakes often do. Because the Kohl’s card is issued by Chase Bank, and Chase also holds two of my other major credit cards, they penalized me with the default rate on both of those cards as well. At the time, one of my Chase cards carried a balance, so this mistake cost me hundreds of dollars in finance charges.
Learn from mistakes: Always make your payments on time, of course, but your responsibility doesn’t end there. You also need to keep tabs on who issues your credit cards, so you know how a late payment might affect other cards. Even after the Credit CARD Act of 2009, a form of universal default still applies to credit cards that are issued by the same bank. If you catch your mistake right away and you know which banks own your debt, you can call the credit card companies and negotiate a lower rate on at least one of the cards before you owe as much as I did.
Confession #3: Being a Data Dummy
I’m not the only one with a costly – and admittedly dumb – late payment. Ellen Porter, a public relations executive, confesses the “dumb credit move” that tanked her credit score and left her without any major credit cards.
She entered her bank account number incorrectly when she went to make an online payment. Since the attempted payment didn’t go through, it became a late payment. The next month, she recalls, “I had to take time off work and use that credit card to pay for an airline flight because of a death in my family. That sent me over the top, financially, and I missed another payment. I had to close the card and agree to a payment plan.”
The first error, a simple data-entry problem, resulted in fees, interest, and a credit score dip – challenging problems, but mistakes that Porter could have resolved. The bad timing of bigger trouble the following month compounded the issue and made it an obstacle she couldn’t overcome.
Learn from mistakes: Double-check (even triple-check) your digits when you’re signing up for any online payments. Check your account a day or two after your scheduled payment to be sure it was successfully processed. If you sign up for automatic bill pay, allow time for processing. Ask a customer service rep if you’re not sure when the company will draw the payment from your account. Even if you’re comfortable with online data forms, never trust your first pass through a new system. And don’t rely on your browser’s auto-fill options. The little errors that come from rushing will cause big problems on your credit report.
Confession #4: Trusting Too Much
I once tried to open a credit card with a different retail store, again to diversify my credit, and perhaps more importantly, to get a great discount on some gifts. I filled out the application, which meant I’d get an instant 30% off. I was also paying with some gift cards, and when the cashier told me my final balance due, she told me that it was too low to qualify for the new cardholder discount. The fine print and minimum charge prevented me from getting the discount, but that was nothing compared to what happened next.
I paid cash instead and asked her to cancel my application. I should have taken the form home and shredded it myself. The cashier took my cash, and instead of canceling my credit card application, the store accidentally opened an account and charged the amount to my new card. I would have addressed the double charge, but I never got a bill. I got a phone call, six months later, to tell me that my “neglected” account was in default. I learned on the call that not only did they open the card (I got approved!), but they entered my address incorrectly, so I never got a bill. It took hours on the phone and an appeal to credit bureau to restore the damage.
Learn from mistakes: The example may be extreme, but a mess like that can happen to you. Remember, as soon as you sign the application, you’re taking on a level of responsibility. You may get accepted or rejected. You might plan to take the discount and cut up the card, or you might expect to charge hundreds of dollars a month. Regardless, once you apply, you have to follow through. Don’t assume that no news is good news. No news can be very bad news. Keep your copy of the application and credit card policy, and if you don’t receive a bill or other mail within a couple of weeks, call the card issuer to find out your status.
Confession #5: Small Business Screw-ups
You know you should only use your credit card when you know you have the cash to cover your debt. But especially if you’re running a business, sometimes a credit card blunder starts with reasonable intentions, like charging a purchase because you expect money to come in that month. When Anthony Green, an entrepreneur and president of the small-business website Take Care of Biz, made his dumb mistake, he learned that you can’t rely on that money.
He says, “The dumbest thing you can do with your credit is to use your credit card or take out a loan without a guaranteed way to pay it back. This summer, one of my companies was expecting a $90,000 payout by late fall, so we took out a $40,000 loan to build infrastructure. The contract unexpectedly fell through, and we ended up struggling to stay afloat until we made some drastic changes.”
A move like this can have huge ramifications for a business, but negative cash flow is natural during rapid business growth stages. For an individual, spending money before it comes in can dig a deep hole of debt very quickly.
Learn from mistakes: For your personal cards, make sure you have the cash to cover any charge you make. This is a great way to rack up credit card rewards points and keep your credit score high while maintaining your financial stability and peace of mind.
For a small business, if you don’t have the luxury of liquidity, consider the risk of rushing a purchase on credit. Do you need to spend right away, or can you afford to wait on a new purchase until after your big sale comes through? Remember, you can’t always trust your clients and debtors to pay you on time. And your lenders won’t care if someone else owes you money.
Using credit always carries risks. For instance, credit card companies count on customers to miss a payment sometime within the first year on those 0% interest offers. But by paying close attention to due dates (especially on new cards), using automatic bill pay options (and double-checking your information before you process the transaction), and never spending more money than you have available in the bank, you can rack up credit card rewards points and enjoy all the other benefits and convenience of credit cards. Plus you’ll enjoy a good credit score, which will get you better rates on car loans, mortgages, and even car insurance.
What credit card confessions do you have? Don’t worry about admitting dumb mistakes. We won’t laugh – we’ve all been there.