When you see some jewelry or clothing that you would like to own, do you ask yourself if you want it badly enough to borrow the money and pay interest to have it? When you go out to eat, do you wonder if you want the meal in that restaurant badly enough to borrow the money to eat there? Many people do not think to ask themselves these questions. This can lead to overspending, which forces many to pay interest on the new clothing or meals for many months to come. While you want some interest payments to show up, you want to be in control of the cards, not have the cards be in control of you.
The old way of looking at a credit report was to look for AA beside each item. AA stood for as agreed. As long as you made the minimum payments (or more), you had AA credit. Today, a complicated formula is used to determine your credit score. Paying your credit card off in full each month could give you a lower score than if you pay interest.
Another common abuse of credit is excessive optimism. Do you really believe that you will never get sick or that your car will never break down? Do you have cash put away for such possibilities? Do you realize that the kids need clothes for school in September or that you may spend more money in December for holiday gifts than you will spend at other times of the year? Have you prepared by saving cash, or will you have to charge everything and make monthly payments?
All of these financial planning failures can get to a point where paying bills on time becomes difficult. When an underwriter looks at your credit history, he or she is looking to see if you borrowed money and repaid it in a timely manner. Did you keep your promise to make payments on time? If so, chances are your promise to repay the loan for which you are applying will be kept. If you did not keep past promises, the underwriter must wonder if you will keep future ones.