Three Tips To Avoiding Bad Credit Decisions

Updated July 2026

Any financially savvy person knows that good credit management is just as important as budgeting and saving money. It’s only by establishing a credit history that you’re able to purchase a home or buy a car. And when you apply for any loan, your credit score dictates the interest rate and ultimately the total cost of financing a loan. A single late payment can push your FICO Score down by 100 points or more, affecting your ability to secure a mortgage with a favorable APR.

But unfortunately, some people don’t give their credit a fair amount of attention. Perhaps because they do not fully understand the factors that can influence their score. As a result, they make mistakes that have a tremendous impact on their financial future. The Consumer Financial Protection Bureau (CFPB) notes that credit scores are calculated using five key factors: payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit inquiries (10%).

If you’ve made mistakes in the past, it’s easy to blame these on lack of credit education. However, there is an abundance of information available to help you manage credit, and you don’t have to be a credit encyclopedia to make wise decisions. But if you want to stay on the right path, you have to know what to do, and what not to do.

1. Don’t Use Credit Cards as a Budgeting Tool

Just because a credit card company gives you a credit card with a $5,000 credit limit doesn’t mean that you have to use the card to the max. The problem is, some people don’t view credit cards as an emergency payment solution. Rather, they see credit cards as an “I can get whatever I want now, and pay it later” card.

This thinking is not only irresponsible, but dangerous. Balances don’t just go away. If you accumulate a lot of debt and have no way of paying it off, you could potentially pay on this debt for several years, essentially making your credit card company richer.

The CFPB advises that credit utilization, the percentage of your available credit that you’re using, is a critical factor in determining your FICO Score. Keeping balances below 30% of your limit is a proven strategy for maintaining good credit. For example, if you have a $5,000 limit, you should aim to keep your balance under $1,500.

To put that in dollars: if you carry a $5,000 balance on a card with the average 14.48% APR, you’ll pay roughly $60 in interest the first month alone. Over a year, that’s over $700, money that could be going toward an emergency fund instead.

SoFi, Chase, and other major lenders use FICO Scores to evaluate risk. A score above 700 typically qualifies borrowers for the best APRs. According to NerdWallet’s 2013 data, the average interest rate on a credit card was 14.48%, but that rate can jump to over 25% for borrowers with scores below 600.

A single missed payment can affect your score for up to seven years. The Federal Trade Commission (FTC) warns that even a single error on your credit report, such as an incorrect late payment, can be costly. Regular monitoring through Equifax, Experian, and TransUnion helps catch these mistakes early.

2. Never Cosign a Loan Without Understanding the Risk

If your friends and family learn about your 800+ credit score, they may ask you to cosign a loan on their behalf. There might be a sob story explaining how badly they need reliable transportation. The need may be legitimate. However, if you fall for this trap, you could potentially end up paying off the loan, or see your credit score drop if the person stops paying the bank.

The decision to cosign a loan is not one to be taken lightly. Think of all the hard work it took to achieve an excellent credit score, paying your credit cards and other loans on time over the years, and paying off credit cards. A single default by the primary borrower can damage your DTI and future loan eligibility.

If you have a 620 score and need about $8,000 for a used car, a co-signer with good credit might lower your APR from 18% to 9%, saving you $1,500 in interest over a 4-year loan. But if you miss payments, that co-signer’s 720 score could drop by 100 points or more.

The Consumer Financial Protection Bureau (CFPB) clearly states that co-signers are legally responsible for the entire debt if the primary borrower defaults. This means a loan you didn’t apply for can become part of your permanent credit history. Even if the borrower pays on time, the CFPB notes that a co-signer’s credit report still shows the account, which may impact future borrowing.

In 2013, over 1.1 million bankruptcy filings were recorded in the U.S., many of which involved co-signed debt. The Federal Reserve found that nearly 40% of people who co-signed for a loan had their own credit scores drop due to the borrower’s delinquency. The FTC also warns that credit repair scams, those claiming to “erase” negative information, often promise results that are impossible under real credit reporting rules.

3. Monitor Your Credit Report Annually, and Use Monitoring Tools

Not only should you avoid cosigning a loan for another person, you should closely monitor your own credit.

It is strongly recommended that everyone check his or her own credit report at least once a year. Everyone is entitled to a free report through AnnualCreditReport.com. However, only a percentage of American consumers check their credit activity on an annual basis.

According to the CFPB, only about 25% of Americans access their free annual report. This lack of vigilance leaves many vulnerable to identity theft and reporting errors. Even one unauthorized account or incorrect late payment can drastically lower your score.

Understandably, we all get busy from time to time. Even so, it only takes one incident of identity theft or a single error to drive down credit scores. Besides, the report is free.

For bonus protection, sign up for credit monitoring. This is an extremely useful tool for keeping an eye on credit activity. When you sign up for credit monitoring, the company will send an email alert anytime an account is opened in your name, which helps catch identity theft early.

Credit monitoring is reactive, not preventive. It alerts you after an account is opened, but it can’t stop a thief from using your information. For proactive protection, consider a credit freeze with each bureau.

Services like Experian, Equifax, and TransUnion offer credit monitoring plans. While some are paid, many financial institutions, including Chase, Bank of America, and Capital One, offer free monitoring to customers with active accounts.

How Credit Utilization Impacts Your FICO Score

Your credit utilization ratio, the amount of available credit you’re using, is one of the most powerful factors in your FICO Score. The CFPB recommends keeping your utilization under 30%. In fact, studies show that people with scores above 750 typically maintain utilization rates below 10%.

Let’s break this down: if you have a credit limit of $10,000 across all cards, you should aim to carry less than $3,000 in balances. The Federal Reserve has found that consumers with utilization above 30% are significantly more likely to default on loans.

Even a temporary spike, like using $5,000 of a $10,000 limit during a vacation, can cause a short-term dip. That’s why some financial experts recommend paying balances in full each month to avoid interest and maintain a healthy score.

Frequently Asked Questions

What is the average FICO Score in 2013?

The average FICO Score in 2013 was around 678. Scores above 700 are considered good, while those above 750 are excellent [FICO].

How often should I check my credit report?

Check your credit report at least once a year through AnnualCreditReport.com, and consider checking more frequently if you’re applying for a mortgage or suspect fraud.

Can I get a free credit report?

Yes. Under federal law, you’re entitled to one free credit report annually from each of the three major bureaus: Experian, Equifax, and TransUnion [CFPB].

Why should I avoid co-signing a loan?

Co-signing makes you legally responsible for the debt. If the primary borrower defaults, your credit score can be damaged, and you’ll have to repay the loan [CFPB].

How does credit utilization affect my score?

Credit utilization, the percentage of your available credit you’re using, accounts for 30% of your FICO Score. Keeping it under 30% is recommended. Utilization above 50% can severely lower your score [CFPB].

What should I do if I find an error on my credit report?

Dispute the error directly with the credit bureau. The FTC requires that bureaus investigate within 30 days and correct verified errors [FTC].

Is credit monitoring worth it?

Yes, especially if you’re at risk of identity theft. Credit monitoring services like Experian IdentityWorks send alerts when new accounts are opened in your name, helping you catch fraud early [Experian].

Can I improve my credit score quickly?

Yes, but only through consistent habits. Paying down balances, fixing errors, and avoiding new debt can improve your score within months. However, negative marks can stay for up to seven years [FTC].

What is APR, and why does it matter?

APR stands for Annual Percentage Rate, the total cost of borrowing, including interest and fees. A lower APR means lower long-term costs on loans. In 2013, the average credit card APR was 14.48% [NerdWallet].

Should I close old credit card accounts?

No. Closing old accounts can reduce your total available credit and increase your utilization ratio. It may also shorten your credit history, which can hurt your score. Keep old accounts open, even if you don’t use them, unless they charge high fees [FICO].