Most people who are mired in credit problems, or have recently moved beyond them, can point to specific reasons why they got into trouble. There are mistakes that can torpedo your credit, and only when you know what they are can you possibly hope to avoid them.
Here are six of the most common mistakes that lead to credit troubles.
1. Living Beyond Your Means
This is the most common reason for credit problems. Credit magically enables people to spend more than they earn or have. That arrangement eliminates the need to save up money to make major purchases. Credit enables you to buy today, even if you don’t have the money. As a result, even a momentary bout of poor judgment can put you thousand dollars in debt. And if you have relatively weak self-control, you could be in for a lifetime of difficulties.
The reason why this becomes a problem is because debt is cumulative in nature. That is, it builds on itself until it reaches the point where you can no longer afford to even make the monthly payments – let alone pay off the balance in full.
The most basic solution is to never view credit as an extension of your paycheck. It’s an easy pattern to fall into, which is why so many people have credit problems.
It takes self-discipline to hold the line – to spend no more than $50,000 per year if $50,000 is what you earn. And in a perfect world, it also means spending a little bit less than what you earn, so that you can save and invest for the future.
2. Taking On Too Much Debt
Debt does have good uses. Certainly it’s needed to make major purchases of items that will last many years. A home and a car quickly come to mind. But even with “good debt” there have to be limits. If you buy more house or car than you can comfortably afford, then you are creating a structurally high cost of living that you may not be able to control.
Credit cards present an even bigger problem. It’s the revolving nature of credit cards that plunge people into credit problems once they get on that merry-go-round. It works something like this: you start out with one credit line and you make a small charge on it. The purchase feels good, and the low monthly payment doesn’t hurt your budget in any significant way.
But from there, you make another charge – and then another. Soon you get a second credit card, and you start the process with that one as well. Then a third is added and so on.
Soon you find that the combination of several “reasonable” monthly payments becomes not so reasonable. You might start borrowing against one credit card in order to make monthly payments on the others. At that point, your credit card debt goes on a permanent trajectory higher. As it does, the monthly payments become even less affordable.
Soon enough, you begin letting payments slip on one or two cards. Eventually, paying late becomes your new normal. When that happens, the banks freeze your credit lines. You’re now saddled with credit cards that require monthly payments, but no longer provide access to the fresh credit that you can’t live without.
From there, the situation goes from bad to worse.
3. Over-Estimating Your Financial Situation
When it reaches that stage, it’s common to become overly optimistic about how it will play out. You begin over-estimating cash windfalls and future income, and underestimating the depth of your credit predicament.
At that point, you may attempt debt consolidation. It sounds good on the surface, but in the end it’s mostly a matter of moving debt from one lender to another. And if you are successful in getting the debt consolidation, that opens up the door to using your now paid-off credit cards to incur even more debt.
Problem not solved, and problem getting progressively bigger.
4. Cosigning a Loan for Someone Else
It’s likely that everyone cosigns a loan for someone else at least once in their lives. This is usually well-intentioned, and done for either a family member or a close friend. But once you cosign a loan, you are essentially putting your credit fate into someone else’s hands.
Here’s the basic problem: the fact that you cosign a loan enables the other party to get the loan in the first place. But once the loan has been approved, how it will be paid will depend entirely on the primary borrower. That person will make the monthly payments – or not – and you won’t even be aware of how it’s all playing out. That is, at least until it’s too late and there’s a problem.
If the primary borrower makes late payments, those payments will show on your credit report and drag down your credit score. And if the primary defaults on the loan, that default will show up on your credit report as if it was your default.
But that’s not even the worst of it. In the event of a default by the primary borrower, you will be held responsible to satisfy the loan. After all, the bank only approved the loan because you agreed to go on it and provide security against a default by the primary borrower. It will then take years before the default is finally dropped from your credit report, so you may have a below average credit score for a very long time.
Most people will cosign loans for others until they get burned. Only then will they realize that cosigning a loan for someone else is usually a mistake.
5. Getting Carried Away With Student Loan Debt
One of the basic problems with student loans is that there is no effective limit on how much a person can borrow. That can lead a student to borrow an amount that is as big as a home mortgage. Except that with a student loan, there is no real estate securing debt that can be sold to make the loans go away.
Since student loans generally cannot be discharged in bankruptcy there’s no escaping the fact that the only way out of the debt is to pay your way out.
Prevention is the only workable solution. You have to find a way to pay for college with a minimum amount of student loan debt, or even none at all. Once the debts are in place, they are nearly impossible to eliminate.
That has translated into a serious matter of delinquency for millions of people. A recent article by the Wall Street Journal reported that 43% of the roughly 22 million Americans with federal student loans weren’t making payments as of Jan. 1.
6. Failing to Get Help When Your Credit is Declining
Even after bouts of denial, many people who have made credit mistakes are at least vaguely aware that they are in trouble, and are only getting deeper into it. It can be difficult to take the step of seeking credit help, because to do so is to admit that you have a problem that is beyond your ability to fix, and was largely of your own doing.
But in almost every credit situation, time is of the essence. The sooner that you take steps to fix your credit problems, the easier the solutions will be. For example, if you let your credit problems go on for too long, bankruptcy and/or foreclosure may be the only options. But if you move quickly, you may be able to engage in credit repair, debt settlement, or combination of both.
The best and fastest way to do this is to get professional help. And the best source is always a law firm that specializes in credit. They know the law, how to make it work in your favor, and how to fix your credit problems quickly and permanently.
But in order for them to do the job for you, you have to take the first step in deciding that you need help. Don’t delay – the clock is ticking on your credit profile.