Do you feel that you are experiencing a few “credit mishaps”? Or could it be more serious credit mismanagement where you may have to consider drastic measures for debt management?

Because good credit rests on a number of factors demonstrated in your credit report, you may be confused about how your credit behavior affects your overall creditworthiness. At the same time, not taking some small credit accounts will prevent good credit development, which also hinders future opportunities for better credit accounts.

Overall, developing and maintaining credit, whether good or bad, should be viewed as a path in which you make wise or poor decisions as to what credit accounts you open, and how you decide to manage them. The path you follow will either enable you to obtain better interest rates and terms on larger credit accounts, be declined credit in future applications, or not be offered credit at all.

There are a few warning signs of early credit mismanagement that you apply to your current credit or debt situation:

Too many credit cards: Because credit cards are some of the unstable revolving credit accounts you are offered (see “Types of Credit”), having more than necessary to develop good credit is only adding additional risk to your credit management strategy. Additionally, having credit concentrated in only one type of credit does not help develop your credit score, as you lack a mix of credit accounts. Finally, because of the varying points of interest, fees, and other charges associated with these accounts, purchases that would be affordable in cash can grow into a costly debt when credit cards are used.

Please see “Developing Good Credit” to find out how to use just 1 or 2 credit cards or other revolving credit accounts as a tool for creating and maintaining credit, and not as a crutch for debt:

Financing by income only: Often, installment credit is given to consumers based on their income. Based on your salary, you may be able to finance big-ticket items, because it appears as if you can afford the regular monthly payment for that purchase (e.g.: your car payment). However, if you couple that installment payment with the other payments you have to make (e.g.: you home audio system, mortgage, or student loan) along with your revolving credit payments (e.g.: your credit and retail cards) as well as your monthly expenses, you may be incurring more debt than you can afford to pay.

What this credit behavior suggests is that you may not have a grasp of your income and expenses. Developing a budget will not only guide wiser decision making about extending the credit available to you, but will also help you in other aspects of financial health, including savings and investment (please see “Budgeting”).

Once you know where you income actually goes, you can also use installment accounts as a tool for credit development, instead of a mechanism for living beyond your means.