If you are looking to take out a loan or purchase a home in the near future, you need to either improve your credit score or maintain your already great score. Thankfully, it’s not difficult to attain a credit score in the 700s or even 800s. Just avoid these mistakes that hurt your credit score.
1. Applying for too many lines of credit in a short period of time. This is especially important if (a) you don’t have a long credit history and/or (b) you are planning to take out a large loan (like a mortgage loan) within 6 months or a year.
While having various lines of credit can actually improve your score, applying for credit frequently can hurt it. Avoid applying for numerous credit cards and loans in a short time frame. These hard inquiries stay on your credit report for 2 years and affect your credit score for around a year.
Instead, strategically decide which type of credit is most important. Apply for no more than one credit card a year (you shouldn’t need more than two total) and remember to factor in any moves you make. The credit check for renting an apartment is considered a hard inquiry, as is any credit check done by a potential employer.
2. Keeping a large balance on your credit cards. Credit utilization makes up 30% of your credit score and experts recommend that you keep your debt-to-credit ratio at 30% or less.
Being close to your credit limits increases your risk in the eyes of lenders. The higher your balance, the higher your minimum payments — and therefore, the less likely you are to make complete and timely payments. Pay down your debt to keep yourself creditworthy and limit accrued interest.
3. Closing accounts. The amount of credit accounts you have can affect your credit score as well, so it’s best not to close most of them. Exceptions to this rule include: store credit cards that you will never use again and any outstanding loans.
By keeping your oldest credit card account open, you increase the length of your credit history which in turn increases your credit score. Some companies will close lines that haven’t been active for a period of time so it is a good idea to automate one of your small bills to be paid by said credit card. Just make sure to pay off the credit card in full each month.
Do not keep loans outstanding just to increase your credit score. It is not worth the extra interest you will pay to have open credit lines. Pay off outstanding loans as quickly as possible if the interest rate is larger than your average market return on any investments.
4. Paying your bills late. Never, ever, ever pay your bills late! On time payments affect your credit score more than any other factor. Besides that, you will likely incur late fees on past due amounts.
While a late payment can hurt your credit score, it’s nothing compared to what an account in collections can do. If you don’t pay your bills for months, they will likely be sent to a collection agency. So now your credit is screwed up AND you are getting harassed by debt collectors. Pay your bills on time, every time. If you are not in survival mode, you really have no excuse not to.
5. Settling with your creditor. In credit card world, “settling” is coming to an agreement with a credit card company to pay less than you owe because you can’t afford the full amount. Try to avoid this.
Once the payment is made, it is reported as negative item known as a deficiency balance. This will have the same effect on your credit score as late payments, really late payments. You can attempt to arrange a deal with the creditor that they will not report a deficiency balance but it is unlikely that they will agree. If they don’t, set up a payment plan to pay in full so as not to further damage your credit score.
6. Ignoring it. Credit scores, while seemingly arbitrary and only reflective of how well we acquire debt, are important for taking out loans, getting approved for mortgages, and even securing new jobs. As much as you don’t like it, you need to pay attention to your score and work to improve it. You didn’t wander into bad credit and you can’t wander out of it.
In order to do this, you need to take steps to improve your score and creditworthiness. Pay your bills on time, don’t max out cards, and don’t apply for new credit regularly. The credit industry is not one that people love, but unfortunately, it is very prevalent. Make sure you take it seriously and improve your own stance within it.
7. Allowing errors to go through unnoticed. Check www.annualcreditreport.com each year to receive a free copy of your credit report from each of the three reporting agencies — Equifax, Experian, and TransUnion. Read them over in their entireties to make sure that no errors have been made.
While this might seem like a waste of time, it is not uncommon for credit reports to have errors. These mistakes can cost you dearly later on in denied credit applications and unfavorable terms. These credit bureaus have separate reports that they don’t share with each other so read through each of the three thoroughly. You’re welcome.
Improve your credit score or keep it up so you can easily acquire loans with favorable terms. Just don’t abuse them. Debt should only be used on items that are almost impossible to pay for in cash or as leverage to generate a larger return. Remember, bigger is ALWAYS better! I mean, when it comes to credit scores at least. (Like I said…ALWAYS!)
Have you made any of these credit score mistakes? When is the last time you reviewed your free credit reports?