5 Credit Rules Everyone Should Follow

Credit card rulesManaging credit correctly requires a certain amount of discipline. If you let your spending get out of control or take on too many loans, you could face big money troubles. That's why, when it comes to borrowing, it's important to have some guidelines.

Here are five rules every consumer should follow so their finances and their credit score remains intact.

1. Make payments on time

Stellar payment histories are key when it comes to establishing a good credit score. They account for the largest percentage of all components used to calculate most credit scoring models and one missed bill will certainly cost you. As this FICO study illustrates, a recent late payment can cause as much as a 90-110 point drop on a FICO score of 780 or higher. Missed bills can also do big damage to your wallet since balances are typically subject to penalty annual percentage rates and late payment fees.

To avoid both pitfalls, it's a good idea to set up auto pay on car, student or home loans so you don't miss a payment. In terms of credit cards, while it's always a good idea to pay off everything you owe, make sure at least minimum payments are made before the monthly bill's due date.

Additionally, "if you have problems paying bills on time, don't get a credit card," says Karen Carlson, director of education for non-profit agency InCharge Debt Solutions.

2. Don't bump against your credit limit

Following payment history, credit utilization ratios -- essentially how much credit you have available to you versus how much you are actually using -- play a big role in shaping credit profiles. To keep scores from taking a dive, it's important to avoid bumping up against credit limits. Instead, try to only utilize 25% or less of all your available credit at any given time, says Deatra Riley, financial education manager for nonprofit credit counseling organization CredAbility.

And don't let anyone fool you into thinking you need to carry balances to give your score a boost.

"I have never seen a credit scoring model award points for that," Carlson says. "It's really about the account being paid as agreed."

3. Always consider your credit score

Whether adding or subtracting to your credit profile, it's important to consider what effect the move is going to have on your credit score. Of course, to do so, you'll need to know what your credit score actually is. Consumers should check their credit reports at least once a year. You can do this for free by visiting www.annualcreditreport.com. You can also monitor your score for free with the Credit Report Card.

As a best practice, you should also pull your credit report right before applying for a new loan. If the score turns out to be less than stellar, you may want to focus on building it before you add any credit cards or installment loans. If your credit score is in good shape, be sure to reap the benefits.

"Be creditworthy when the opportunity arises," Carlson says, so you can get the best interest rates on each line of credit. You'll also be eligible to score the best rewards credit cards.

4. Understand the terms and conditions associated with all your loans

Terms and conditions vary from product to product, so it's important to read through every single loan or credit card contract before you go ahead and sign on the dotted line. According to Brent Neiser, senior director at the National Endowment for Financial Education, you should be sure to check what interest rates are being offered and when they will be applied. You also want to thoroughly read through fee structures so you have a good sense of the costs associated with each line of credit.

Additionally, ask "what are the incentives?" Neiser says.

If you've haven't combed through a contract before accepting a loan, you will need to ultimately make time to read through the fine print. Riley also suggests printing out contracts and keeping them in a "safe, secure place" so they can be easily accessed should you encounter an issue.

5. Charge in accordance with your budget

A credit card can be a powerful payment method, since it allows you to earn points on purchases and may also get you access to exclusive perks and discounts. But special offers can easily be rendered moot if you don't control your spending and end up with a mountain of interest-incurring debt instead. To avoid winding up in dire financial straits, Carlson suggests using credit cards in accordance with a written budget.

"This is the [rule] most people don't follow," she says, since it's very easy to think of a credit card as a financial lifeline. However, you need to be sure to only charge items you could pay for even if the line of credit wasn't at your disposal. You also need to make sure this budget contains a savings plan.

"Don't use a credit card as a replacement for your emergency fund," Carlson says. "Credit is a wonderful tool to meet the needs of positive events. It's not a tool for negative events."

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#6 There is no free lunch! Don't even ask for one.

July 01 2012 at 7:47 AM Report abuse +2 rate up rate down Reply

Unusually conservative and sane article here on AOL. I just wonder if this line of reasoning is just for the "little people", or should the Elite running government also take heed? Probably just the former.

June 30 2012 at 8:03 PM Report abuse -1 rate up rate down Reply

Job losses peaked in early 2009, and steadily declined throughout the year. The economy finally started creating jobs in the beginning of 2010, but then employers pulled back in the summer. A similar trend occurred in 2011, and then again in 2012, when strong momentum early in the year stumbled in the spring because OBAMA did nothing to create jobs or help small business!!!

Apparently this is all new to OBAMA and his adminastration, on perhaps he is doing the blame game again, as it must be GWB's fault?

June 30 2012 at 1:31 PM Report abuse +3 rate up rate down Reply
1 reply to FlyingLow's comment

Congress is the problem..that's why they have a 14% approval rating.

June 30 2012 at 9:09 PM Report abuse +1 rate up rate down Reply

That one late payment or even two can be so punitive is disgusting and cynical. one may have a card for years and be a great paying customer and one or two slip ups a year getting the payment in a bit late by a weeks or so or even missing it accidentally..these companies treat people like garbage

June 30 2012 at 2:08 AM Report abuse rate up rate down Reply

The increase in the required Medicare premium that you have to pay will almost double in 2014, up to $214.00 approximately, according to Blue Cross/Blue Shield. If you had not heard, check it out. I don't have any confidence in either one of them, but Romney will get my vote simply by default.

June 29 2012 at 4:05 PM Report abuse -1 rate up rate down Reply
1 reply to jl7503's comment

All bs...

June 30 2012 at 9:09 PM Report abuse +1 rate up rate down Reply

Buy only what is necessary. Hide your money. The government is coming for it, Mandates, taxes, anything to get it from the middle class and bail out the non workers, the people on disability due to alcohol and drugs. The days of having two jobs to support your family are gone. People today want the government to support them and their families, and the government is only too happy to do so.

June 29 2012 at 4:02 PM Report abuse +2 rate up rate down Reply