By Allison Martin for CentSai
When I turned 18, I was on top of the world. I’d moved away for college and could finally go on as many mini-shopping sprees as I pleased, thanks to my shiny new credit card. Little did I know, irresponsible debt management would land me in the hot seat with creditors in less than three years.
The path to financial blowout began in the summer of my freshman year. Long story short, I fell for the loads of freebies offered to college students in exchange for completing credit card applications. And I didn’t just apply for one credit card; I applied every time a new creditor would set up shop on the campus lawn. Surprisingly, I was approved for several credit cards with decent spending limits. The creditors didn’t seem to care that I was living on a minimum wage income and scholarship proceeds.
All was well until the minimum payments skyrocketed from $25 to more than $100 per card, and I could no longer afford to make the payments. Ultimately, my credit took a hit and my finances followed suit until I stopped swiping away, picked up a part-time job to pay down the balances, and got back on my feet.
Here are a few credit truths I wish I hadn’t ignored:
A study conducted by the Federal Trade Commission (FTC) in 2012 revealed that one in 20 consumers had an error on at least one of their credit reports. This is concrete evidence that mistakes are bound to happen. But if you don’t review your credit report, you’ll never know if you are among the wrongly discredited. And if you do discover an error, it’ll likely be at the most inopportune moment, like when you desperately need an auto loan and are denied for financing because of some delinquent account you had no knowledge of. Even worse, you could end up forking over your hard-earned cash to cover fraudulent transactions or paying more in interest on your next loan due to negative-but-inaccurate information on your credit report.
You can review your report for free, once per year through AnnualCreditReport.com.
The first time I was denied a credit card, I decided to retrieve a free copy of my credit report, since the letter from the creditor mentioned something about a collection account. The document was a bit confusing, as I’d never seen a credit report, but I quickly noticed an account that didn’t belong to me. I called the number listed on the report to plead my case, but the customer service representative told me I’d have to file a formal complaint. I thought that I could submit the required documentation and the issue would be resolved within a few days. To my surprise, it took months.
(Quick note: If you are denied credit, you are also entitled to a free copy of the credit report used by the lender to make the decision.)
I’ve heard time and time again that credit cards are bad and should be avoided at all costs. However, the credit card itself can’t do any harm.
It’s when you spend recklessly and make late payments that you run into issues. But if you do the exact opposite, your credit score will increase and you’ll qualify for better rates on loans and other debt products.
Payment history has the greatest impact on your credit score. It accounts for a whopping 35 percent, so you should reach out to your creditors promptly to make arrangements if you can’t afford the monthly payments.
Fortunately, late payments usually aren’t reported until you are more than 30 days late. But if you do reach that point, be aware that your credit may take a steep dive.
The first time I missed a payment, my FICO score plummeted by 92 points and it took a year for it to recover. To make matters worse, the outstanding balance was only $12.72. Had I paid closer attention to my statements, I could’ve avoided the issue altogether.
Although new credit only accounts for 10 percent of your FICO score, the impact could be greater if you are a credit newbie and there isn’t much present in your credit report. Applying for too many credit cards in a short span of time could also convey to creditors that you are desperate for credit, which may result in automatic rejection. Furthermore, each inquiry automatically deducts points from your score.
I spent thousands of dollars axing credit card debt and getting my finances under control, but you don’t have to travel down the same road. The next time you apply for a credit card, make sure that you actually understand how it works, and that you know the severe financial impact that can result if you don’t manage your accounts responsibly.
This post originally appeared on CentSai.