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Managing 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 credit rules every consumer should follow so their finances and their credit score remains intact.

1. Make payments on time

Calendar used to help make payments on time

Image: SquiffyEye

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

Figure bumping against a limit

Image: Daniel Rossi

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 non-profit 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

Numbers representing various credit scores

Image: 20 Letters

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 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

Man using a magnifying glass to read through terms and conditions of a loan document

 Image: Lazurite

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

Budgeting book used to analysis progress

Image: tercerojista

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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