Four moves that can damage your finances unexpectedly
When you鈥檙e trying to establish and maintain excellent credit, it鈥檚 important to keep an eye on your credit reports. But those reports don鈥檛 tell the full聽story of your finances.
Some less-than-creditworthy moves might not show up on credit reports but could still affect your credit score. Others may not hurt your reports or聽your scores but could still lead to financial problems later. To avoid such surprises, it鈥檚 important to pay attention to all of the ways you deal with loans, credit cards and bank accounts 鈥� even if those actions don鈥檛 seem related to your credit.
These聽four moves might not affect your FICO score but can still harm your overall financial health.
1. Making just the minimum payment on your credit card
For credit card accounts, reports typically list your credit limit and your most recent balance and payments, without specifying whether the recent payment is at or above the minimum payment for that card.
But making just the minimum payment can still hurt you.
鈥淲hile making the minimum payment will not hurt your credit report directly,鈥� says Rod Griffin, director of public education at Experian, 鈥渋f you only make minimum payments and continue to charge, your balances may increase, which can hurt your credit score because you will be increasing your utilization rate.鈥� The higher your聽, the more your score can drop.
[If you find yourself caught in the minimum-payment trap, check out聽.]
2. Taking out cash advances
On your credit report, cash advances generally are included in your total credit card balance, not listed separately. However, you should exercise caution when using credit cards to get cash.
That鈥檚 because credit cards typically charge an upfront fee ranging from 3% to 5% of the amount you receive. That means a $1,000 cash advance on your credit card will generally cost you between $30 and $50. Also, cash advances are usually charged a higher APR than regular purchases. This makes cash advances a costly choice in both the short and the long run. Griffin recommends checking your credit card contract before you take a cash advance.
[To avoid cash advance fees and APRs, see聽.]
3. Keeping a negative聽bank account balance
If your checking account has had a negative balance for a while, the bank may 鈥渃harge off鈥� the account by closing it and declaring it a bad debt. While this is similar to聽, it won鈥檛 appear on your credit report. But that doesn鈥檛 mean you鈥檙e in the clear. 鈥淭here are other consumer reporting agencies, called debit bureaus, that collect insufficient-fund data,鈥� Griffin says.
If your checking account is charged off, the bank may report this to a debit bureau, usually. You鈥檒l still owe the bank the amount you overdrew, and the resulting negative mark can make it difficult to open another bank account.
[Staying out of negative territory may simply be a matter of choosing overdraft protection. See]
4. Co-signing a loan
Before you co-sign on a loan for a family member or friend, keep in mind that you鈥檙e not just lending your good name to help someone secure a loan. By signing the application, you become equally responsible for repaying聽the debt. The loan will show up on your credit report as though you鈥檙e the primary applicant, rather than simply specifying that you鈥檙e a co-signer.
Co-signing a loan can be dangerous because it ties your credit to that of another person. If the other party misses a payment, your credit takes a hit unless you foot the bill. It also effectively increases your debt load, even if the other party pays on time over the life of the loan. This can make getting a loan difficult if it increases your debt load above lenders鈥� allowable limits.
The bottom line
By paying attention to factors that can harm your overall credit picture beneath the surface聽and then acting accordingly, you can achieve or maintain excellent credit 鈥� and avoid potential financial surprises later on.
This article first appeared at
