3 signs you’re in a bad relationship with your credit

Hey, we get it. It’s complicated. But credit cards are not a two-way relationship. They love you to use them. They love you to abuse them. Yet they rarely reward you for having a healthy relationship.

Who has the worst credit habits? The answer may surprise you

Credit card debt and abuse have long been blamed on the younger generation, i.e., those college kids who go on a spending spree when they get their hands on their first credit card. But according to one 2013 study from the W. P. Carey School of Business at Arizona State University and the Federal Reserve Bank of Richmond, the reality of credit card debt may be quite opposite of what we expect.

In the study, young borrowers from the ages of 18 to 25were the least likely to have serious defaults on their credit cards. These young borrowers were also more likely to be good credit candidates later in life — with the potential to prequalify for a mortgage at a young age.

“Don’t get me wrong — there are millions of people that use credit cards like a tool,” Scott Cummins, Production Manager and Senior Loan Officer at Cornerstone Home Lending, Inc., says. “An instrument to bridge the gap between things you need and the ability to pay for them. There even millions that exploit the credit card relationship for their own gain, racking up a ton of travel miles and points. But for every one of those people, there are four others who are looking for every opportunity to break up with their credit cards.”

You may be on the road to bad credit: 3 warning signs to watch for

Where do you fall on the credit card spectrum of use-to-abuse?

If one or more of these warning signs rings true, it may be time to reassess your credit card statements and check in with a financial advisor:

You’re always late. It’s an unavoidable fact. Late payments on bills are going to lower your credit score. Even if you usually pay on time but forget to pay your student loan payment or unpaid medical bill just once, this small slip-up could lower your credit score as much as 90-100 points. The drop may be more if you’ve been delinquent on payments before.

To curb forgetfulness, set up automatic reminders on your phone that repeat monthly to alert you at least five days before your bill is due. An app like Mint can also send you automatic reminders with its “don’t-miss-a-bill” feature, and you can pay online from your phone. If you don’t have the funds to pay your monthly bills, pay your biggest debts first. Neglecting a larger bill will affect your credit score more than a small delinquency.

You’re always looking for something new. The “shiny ball syndrome” applies to credit cards too. Every time you apply for a new card to open up a new line of credit, a company will check into your credit history. Multiple credit inquiries may look suspicious and can hurt your credit score. In a worst-case scenario, you may find that a mortgage lender rejects your application because your credit score is too low. To avoid this credit over saturation, try to streamline your cards or get a credit card consolidation loan. Use one main card for everyday expenses and pay monthly or pay as you go. When you use your credit card for basic necessities that you can pay off as needed, you’ll build up credit each day without thinking about it.

There is a catch. Canceling existing credit cards can negatively impact your credit score by decreasing your amount of available credit. When this available credit shrinks, the credit percentage you’re borrowing, or what FICO calls your “credit utilization ratio,” will be skewed higher. Instead, set aside the cards you no longer use — and hide them if you have to.

You’re clueless about your relationship status. The worst kinds of relationships are those where you don’t know where you stand. Fortunately, with credit, there’s an easy fix for this relationship confusion. Start by getting a clear picture of your finances, including your current credit score and how much you owe. If you have debt you are ignoring, it’s still growing interest every day. Credit cards with higher (and compounding) interest may be especially dangerous— like a retail credit card with a 22 percent APR.

Many people remain blissfully unaware that they’re entitled to a free credit report each year. Staying in the know about your current credit score can clue you in on which financial habits you may need to change. You can improve a poor credit score by practicing the two tips above. And if your credit is fair to good, you can continue to keep an eye on your annual report to catch any signs of fraud or errors that could impact your score.

You may reach a point at least once in your life where your credit debt gets out of control.“Let’s say you exceed your monthly budget for groceries because Bruno Mars is coming to town, and there is no escaping that,” Cummins says.“The frugal move is to eat out less next week and get back within your budget. The easy thing to do is to go out to eat and use your ever-handy credit card. A couple of weeks later, you receive a bill from your credit card. The damage? Just a minimum payment of $35! So, you pay the minimum,and the love affair begins.”

Sadly, this pattern of over-spending becomes a lifestyle, and lifestyles are hard to change. The old cure of freezing your cards in a bucket of water just does not work anymore now that the world has smartphones, and Amazon delivers in three hours, Cummins explains. “The only way out is to recognize that you’re spending beyond means and take it one week at a time. It can be done. It will be hard,” he says. “But imagine seeing Bruno Mars and knowing that your evening was made possible by you and not your plastic friend — that’s 24K Gold.”

For educational purposes only. Please contact your qualified professional for specific guidance.

Sources are deemed reliable but not guaranteed.