By Holly Johnson*
Credit mistakes don’t have to leave you with poor credit for the rest of your life.
Many people have overcome their credit problems, and so can you, with a little bit of time and patience.
Proof that credit mistakes can be overcome
Over time, many financial experts have made credit mistakes they’ve had to mend one way or another.
Fortunately, this means that you, too, can fix your credit snafus if you apply logic to your mistakes and take actionable steps to remedy them.
If your credit is suffering for any reason, it’s possible to get on the right track to fix it this year.
Here are some of the mistakes you may have made, plus the best ways to move forward.
Paying interest on a rewards credit card
Earning credit card rewards can be advantageous if you are able to use credit cards without getting into debt.
But what happens when you pursue rewards without a plan to pay off your balance immediately?
Deacon Hayes, founder of the Well Kept Wallet blog, found out exactly what happens the hard way.
When he and his wife were married, they put their honeymoon on a credit card to rack up cash-back rewards.
They ended up paying a lot more in interest than the paltry 1–2 per cent cash back they earned.
Why?
Because it took them months to pay off their honeymoon bill, and all of that was at their credit card’s 15 per cent annual percentage rate (APR).
Rewards credit cards typically have higher interest rates than other types of cards.
People who carry balances would be better off forgetting about rewards and getting a card with a low interest rate or zero per cent purchase APR.
The bottom line: if you’ve earned rewards but wound up carrying a balance, there’s not a lot you can do now other than pay it off.
But in the future, stick to low or no-interest credit cards if you know you can’t pay off your balance right away.
Being too scared to build credit
Growing up, money blogger Caroline Vencil was told by family members that credit cards were “the devil.”
As a result, she never bothered to get a credit card or build her credit in any way.
This strategy worked fine until Vencil graduated university and wanted to finance a vehicle.
Because she had no credit history, she was unable to get a car loan.
Things got worse for Vencil when she followed the advice of the car dealership and got four new credit cards right away to “build her credit”.
Because too much new credit can hurt your credit score, Vencil’s FICO score quickly tumbled.
She eventually worked to build her credit by using her new credit cards responsibly, making her payments on time, and not carrying a balance.
However, she learned a huge lesson from the ordeal: learn about credit and credit cards from experts and not necessarily from well-meaning but ill-informed relatives.
And never jump to sign up for four new credit cards just because a car dealership says so.
Most of the time, you’ll be a lot better off if you build credit slowly over time.
Using a cash advance to invest
Joseph Hogue, a chartered financial analyst and founder of Peer Loans Online blog, says one of his biggest credit mistakes was using a cash advance from his credit card to borrow $3,000 to invest in stocks.
Hogue says in 1999 when the stock market was hot, he figured he could easily gain at least 14 per cent annually on his investment.
Unfortunately, his hopes were dashed when, around a year later, he wound up losing $800 of the money he borrowed.
But things were even messier than that since Hogue was also paying interest on the money he charged.
Credit card cash advances are a notoriously expensive way to borrow.
They come with cash advance fees, and interest rates tend to be higher than the card’s regular purchase APR.
Hogue says the moral of the story is: “Never invest borrowed money and be careful how you use your credit cards.”
These days, Hogue says he only uses credit for purchases he can pay off right away, and he is much better off for it.
Charging a huge purchase without a concrete plan to pay it back
Chris Peach, who blogs at MoneyPeach.com, says his biggest credit mistake was one that seemed super smart at the time.
When he and his wife were married in 2008, Peach says they saved up $10,000 for a $20,000 wedding and charged the rest.
They pretended they were making sophisticated financial decisions by promising themselves they would pay off the balance as soon as possible.
Unfortunately, life happened and that wasn’t as easy as they thought.
“It took us almost four years to pay off the balance,” he says.
Looking back, the blogger says it was the dumbest financial decision they have ever made.
They charged $10,000 without any sort of plan to pay it back, and even convinced themselves they were making a financially savvy decision.
Today, Peach says they no longer mess around with debit or credit cards for that matter.
Instead, they use a simple method to pay for groceries, shopping, and travel: cash.
This story, like the others on this list, shows that it’s possible to make poor decisions with your credit and still go on to live a financially fruitful life.
We all make mistakes, but it’s how we handle them that sets the tone for the rest of our lives.
* Holly Johnson is a freelance writer from Indiana USA. She tweets at @ClubThrifty.
This article first appeared at www.wisebread.com.
