This is a 5 Part Series explaining the basics of good credit.
The habit of paying your bills on time is the single biggest factor in the calculation of your credit score. It sounds pretty self explanatory. If you pay your bills on time, each and every one of them, you will do well. It would be a mistake to think that some bills (like utilities) don’t count because they’re tied into public services. Just because they haven’t turned off your power doesn’t mean they haven’t reported your late payments. If your payments have been so late that you have had collection accounts, charge offs, or even bankruptcy, you’ll need to do some serious work to improve your credit.
If you have a history of late payments, you need to find a way to pay your bills on time. If you hate messing with stamps and checks, or if you spend all your free-time online, then set up online payments. If you travel, or are just too busy, then set up automatic payments. If you don’t have enough money then you need to increase your income or cut back on your expenses. Ok, I know that last one doesn’t sound easy, but it is doable for everyone. (In a future article, I’ll examine some of the innovative ways people have found to increase their budgets.)
Not only will late payments ruin your credit, they will also cost you extra money:
- Late Payment Fees: Every time you make a late payment, you will be charged an inconvenience fee. And you do have to pay that fee, even if you’re just a day late. If you’re on a limited budget, or in a hurry to pay down a debt, late fees will add to your worries because it’s extra money that you weren’t planning to spend.
- Interest Rate Penalties: When you make late payments, credit card companies have every right to increase your interest rates. That means that the nice 0% interest card you used to transfer your debt could suddenly become a 30% interest rate card, making it nearly impossible to pay off your debt. With the new credit card rules in effect this year, it slightly harder to increase your personal credit card interest rate, but not impossible,
- Lower Credit Score: The negative marks on your credit will lower your credit score. We all know that a lower credit score will cost you more. Low credit scores can increase your interest rates and insurance rates. It can also prevent you from getting new credit, job offers, making your get a cosigner or having to put a deposit for utilities and even rental housing.
Your payment history is 35% of your score and is the most important single factor, but there are four more factors – see more about this in the next four issues.
Jill Russo Foster is the author of Cash, Credit, and Your Finances: The Teen Years. She provides practical tips for every day finances. Learn more about protecting your credit and living within your means, with Jill’s popular free reports and bi-monthly ezine, available here ==> CashCreditandYourFinances.com
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