Signs You’re Falling into a Bad Credit Cycle

When used properly, credit can be a powerful tool that can help put you ahead financially. Many credit-savvy consumers use low-interest debt to purchase major assets that are likely to gain value over time, such as a home or investment property. Ultimately, the key to using credit is having the right mindset and level of discipline to manage your debt.

Unfortunately, many consumers get caught up in a cycle of bad credit habits that stems from overspending and poor financial planning.

Here are three signs you may be falling into the bad credit trap.

1. You’ve lost track of how much you owe.
   Not knowing your debt balances and how much money you owe typically occurs when you’re constantly swiping your credit card and not tracking your spending.


2. You owe more than you make.
   A wise person once said, “Don’t spend beyond your means,” which means don’t spend more than you can afford. If you do, you most likely will end up with a high debt-to-income ratio, meaning you owe more money than you make. When this happens, you wind up accumulating more debt from interest.


3. You struggle to pay your bills on time.
   Once you’ve developed the habit of spending more money than you make, you may find yourself making the minimum payment on credit card balances and/or struggling to pay your bills on time, which can lead to past-due balances and late fees. If this is the case, you may want to contact your creditors to discuss your financial hardship and see if you can make any adjustments to your payment plan.

If you’ve fallen into a bad credit cycle, here are some steps you can take to work your way out of it:

1. Create a budget and stick to it.
   Excessive spending is the easiest way to get caught up in a bad credit cycle. To help you spend within your means, evaluate your monthly expenses (i.e., mortgage or rent, utilities, student loan payments, cable, Internet, etc.) and come up with a realistic budget for your spending and saving.


2. Set up automatic bill payments.
   Paying your bills on time — every time — is a sure way to improve your credit score. Setting up automatic payments and/or reminders can help you develop good credit habits and stay on track with your finances.


3. Pay more than the bare minimum on your credit cards.
   Making minimum payments on your credit card balances can cause you to pay more interest in the long run. Paying more than the minimum or, better yet, the balance in full, is a good way to boost your credit score and build good credit history.


4. Keep balances low on your credit cards.
   Since credit scoring models may look at how close you are to being "maxed out" on your available credit, try to keep your balances low in proportion to your overall credit limit. Experts advise keeping your credit card use at no more than 30 percent of your total credit limit.


5. Don’t apply for credit cards you don’t need.
   Although it may help build your credit history, applying for a new credit card after maxing out your other ones isn’t good for your financial stability. Keeping your credit cards to a minimum and paying off the ones you already have is a good way to maintain discipline.

If you have bad credit or no credit and need to get approved for auto financing, Credit Acceptance can help! See if you pre-qualify on our website and we’ll connect you with a dealership in your area that can help you get started!

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