Your Good Credit Doesn't Mean You Have Good Money Habits

Dan Rafter — Thu, 12 Oct 2017 09:00:06 +0000

Your credit score is great. You have no trouble qualifying for auto or mortgage loans. Credit card providers stuff your mailbox with offers for rewards-laden cards. You're obviously practicing good money habits, right?

Not necessarily. It is possible to have a high credit score while still struggling with bad financial habits. Don't let your solid score blind you to these key money mistakes that could cause you financial pain.

Carrying a balance on your credit card

If you charge items on your credit cards each month and make at least your minimum required monthly payments, that will boost your credit score. And if you have high enough credit limits, carrying a moderate balance on your credit cards each month won't drag your score down too much.

But carrying a balance on a credit card, even if it isn't preventing you from having a high credit score, is a big financial mistake. It's not unusual for cards to come with interest rates of 17 percent, 18 percent, or even 20 percent. If you carry a balance on your cards from month to month, those high rates can cause your credit card debt to soar.

The better move? Only charge what you can afford to pay back in full each month. That will help maintain your good credit score without leaving you with an ever-growing pile of credit card debt. (See also: The Fastest Method to Eliminate Credit Card Debt)

You're not saving anything

Maybe you pay all of your bills on time. Maybe you don't have any credit card debt at all. But if you don't have any savings, that's not a good financial sign.

How much you've saved, or haven't saved, doesn't impact your credit score. Whether you have $20,000 in a savings account or $100, your credit score won't budge either way. It's important to have a strong credit score and to pay your bills on time, of course. But not having any money leftover to build a savings is a bad money move. (See also: 4 Easy-to-Fix Reasons Your Savings Account Isn't Growing)

You've never built an emergency fund

An emergency fund is a bit like having savings; only with this kind of fund, you're saving money, usually in a low-risk savings account, specifically to cover unexpected financial emergencies. That way, if you suddenly must shell out thousands of dollars to repair your car, you won't have to resort to charging this expense on a credit card. You can take the funds out of your emergency fund instead.

Also like savings, you can have a high credit score and no emergency fund. Having a high credit score is no excuse for not building this financial safety net. (See also: How to Balance Saving for Retirement, Emergency Fund, and Paying Off Debt)

You're way behind on saving for retirement

It's possible to enter your golden years with a stellar credit score but no money saved for retirement. That's because the amount of money you've socked away in an IRA or 401(k) plan is not factored into your credit score.

Don't let your strong credit score, and your easy access to loans and strong credit cards, blind you to the fact that you're not saving enough for retirement. It's nice to have a good credit score after you've left the working world, but that score won't mean much if you can't afford to pay your bills. (See also: How Much Should You Have Saved for Retirement by 30? 40? 50?)

You're struggling to pay the bills each month

You might never miss a utility bill, mortgage payment, or auto payment. But what if covering these bills each month is a constant financial struggle? What if you never have enough money left over to invest or deposit into an emergency or retirement fund? Your credit score won't suffer, but your financial health is a different story. (See also: How to Escape the Paycheck-to-Paycheck Cycle)

Again, it's easy to let a high credit score trick you into thinking you're in solid financial shape. But if paying the bills is a tightrope act each month, your high credit score is merely hiding deeper financial problems. One unexpected financial hiccup — such as a blown hot water heater or leaking roof — could suddenly set you back. And then you might not be able to cover every bill when the due dates arrive. (See also: Pay These 6 Bills First When Money Is Tight)

The key is to focus on both increasing your savings while continuing to take the steps that have led you to a solid credit score. Cut back on your optional spending to start building savings and an emergency fund. Open a 401(k) plan or an IRA to start saving for retirement. Even saving a little each month is better than doing nothing.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: