Four moves that can damage your finances unexpectedly

If you work hard to keep your finances in order, don't let them slip into the red by mistake. These four moves can bring unexpected consequences. 

|
China Daily/Reuters/File
An investor points at an electronic board showing stock information at a brokerage house in Nanjing, Jiangsu province, October 23, 2015.

When you’re trying to establish and maintain excellent credit, it’s important to keep an eye on your credit reports. But those reports don’t tell the full 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 your scores but could still lead to financial problems later. To avoid such surprises, it’s important to pay attention to all of the ways you deal with loans, credit cards and bank accounts — even if those actions don’t seem related to your credit.

These 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.

“While making the minimum payment will not hurt your credit report directly,” says Rod Griffin, director of public education at Experian, “if 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.” The higher your credit utilization ratio, the more your score can drop.

[If you find yourself caught in the minimum-payment trap, check out 7 Ways to Find Extra Money to Pay Off Credit Card Debt.]

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’s 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 NerdWallet’s Best Credit Cards With No Cash Advance Fee.]

3. Keeping a negative bank account balance

If your checking account has had a negative balance for a while, the bank may “charge off” the account by closing it and declaring it a bad debt. While this is similar to having your credit card debt charged off, it won’t appear on your credit report. But that doesn’t mean you’re in the clear. “There are other consumer reporting agencies, called debit bureaus, that collect insufficient-fund data,” Griffin says.

If your checking account is charged off, the bank may report this to a debit bureau, usuallyChexSystems. You’ll 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. SeeIs Overdraft Protection Must-Have Coverage?]

4. Co-signing a loan

Before you co-sign on a loan for a family member or friend, keep in mind that you’re not just lending your good name to help someone secure a loan. By signing the application, you become equally responsible for repaying the debt. The loan will show up on your credit report as though you’re the primary applicant, rather than simply specifying that you’re 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’ allowable limits.

The bottom line

By paying attention to factors that can harm your overall credit picture beneath the surface and then acting accordingly, you can achieve or maintain excellent credit — and avoid potential financial surprises later on.

This article first appeared at Nerd Wallet.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Four moves that can damage your finances unexpectedly
Read this article in
https://www.csmonitor.com/Business/Saving-Money/2015/1023/Four-moves-that-can-damage-your-finances-unexpectedly
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe