5 Credit Score Mistakes and How to Avoid Them
Having a good credit rating is very important as it can affect an individual’s ability to borrow money and secure credit. Moreover, a good credit rating is also important in helping people secure mortgages, a personal loan, or even a mobile phone contract. More often than not, people tend to overlook a few key tips to avoid credit score mistakes.
Your credit score is an important indicator of your financial world. It is a difficult task to develop good credit habits to build and maintain a good credit history.
It is important to learn and avoid common credit score mistakes that can stop your progress and also damage your credit score for years.
Here are some of these commonly made credit score mistakes
Why are You not Checking Your Credit Often?
Although millions of us have no idea what a credit report looks like, this in itself is a big credit score mistake. In many cases, credit reports have information that is incorrect. Yet, without proper checks, the information stays there and thus affects the credit prowess of the individual concerned.
Ergo, it is important for you to keep a regular check on your credit report and report any errors that might exist in it.
Keeping track of your credit score is a good way to know the progress of your credit but also to spot any issues and address them before they create any damage to your score.
You can check your credit report and score often. You can get a free credit report every year by approaching any of the three major credit bureaus (Experian, Equifax, and TransUnion).
When you review your credit health, check the items that can hurt your credit score or already damage your credit, so that they can be rectified quickly.
Making Late Payments or Missed Payment
Payment history has a big impact on your credit scores, and even missing payments will create havoc on your credit.
The late payments on loans and credit cards are reported if you are late by 30 days or more. So if you are late by one day, it may result in penalties and late charge fees. But it won’t damage your credit if you get current on your account before the 30-day mark.
One of the most common reasons people fail to pay their bills on time is the bad organization of their credit. For example, failing to keep a record of all open credit lines can lead you to forget which bills to pay and on what date.
Of course, failure to settle bills on time is a clear indicator to credit card companies or lenders that you are either facing financial trouble or are just irresponsible. In any case, this behavior will be visible to lenders and can greatly damage your ability to obtain new credit.
If you get hit with a late payment on your credit report, it will remain on your report for seven years. The impact on your score will lower down over time with any new positive information, but it can still slow down your credit growth.
To ensure you pay all your bills on time, set up autopay through your lender, or request payment reminders from your lenders. Make sure that you have enough money in your account each month to pay off the bills.
Making Minimum Payments
Paying only the minimum amount due on your credit cards that carry interest will charge you more rather than paying all of your debt every month. It can also damage your credit score.
It is because you make only the minimum payment every month, and in the end, you carry a high balance on your credit card. This increases your credit utilization ratio, which is the percentage of your available credit you are using at a given time.
So a high utilization ratio results in damaging your credit score if your credit report is not checked. A credit utilization ratio of above 30% can start to reduce your scores.
Paying down your balances so they’re all under 30% utilization is a good start. But if you have a significant amount of debt, consider attacking it with the avalanche method or snowball approach to paying down your cards’ balances.
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Making Multiple Applications
If you apply for a credit card, virtually every time, the lender will run hard inquiries to check your credit report. This helps them to determine whether to approve your application.
When you’re seeking types of loans such as mortgage and auto loans, having multiple inquiries in a short period typically won’t do much harm because they are all counted as one inquiry when calculating your credit score.
When someone applies for credit, there is an inquiry made on their credit report. If you apply for a credit card, the application will show up on the credit report at the end of the year.
Filling in multiple applications for credit might give the impression that your previous applications were rejected. Every application lowers your credit rating.
When you apply for multiple credit cards in a short period each inquiry will have a count against you. But multiple inquiries can have some effect on your credit score and cause creditors to consider you to be a risky borrower.
Taking Unnecessary Credit
If you take out student loans and use the money for other purposes, or get a personal loan to pay for a vacation, or pile up a credit card balance with discretionary purchases, these actions will have an impact on your budget, making it a challenge to keep up with your monthly payments and increase the likelihood that you will miss a payment. It will also increase how much you owe, which will also have a negative impact on your credit score.
Apply for credit when you are in real need of it. In this way, you will avoid paying unnecessary interest charges.
Closing Credit Card Accounts
One of the major credit score mistakes is closing your credit accounts.
When you close a good-standing credit card account, the history remains on your credit reports for up to 10 years. This type of action will hurt your credit score temporarily. While closing accounts, you lose the available credit, which causes your total credit utilization rate to go up.
Your credit score will no longer benefit from on-time payments over time, which won’t hurt your credit score but could slow down your growth.
If you have paid off one of your credit cards or have one you don’t use anymore, it will close the account. Closing accounts this way is the fastest and easiest way to lower your credit score.
Canceling a credit card reduces the available amount you have. If you have a balance on any other cards, your credit utilization ratio will increase. 30% of your FICO credit score is impacted by your credit utilization ratio, in which your total debt owed is divided by your total credit available. If that card is older than the rest of your accounts, it will reduce the average age of your credit history.
Increase Your Credit Limit
If you have a high credit ratio, then increasing your credit limit will improve it. If you want to maintain good credit, then keep your credit utilization low.
When you ask for a credit limit increase from the credit card issuer, they will re-evaluate your financial situation and decide whether to grant one. A request to increase your limit is treated the same as a new application for credit, which results in a hard pull on your credit reports.
Talk to your credit card companies about the credit limit increase and then apply for it. If you have a strong relationship with your credit card company, you can hold existing loans or maintain large balances on your deposit accounts. It will grant an increase without pulling down your credit.
Overspending for the Rewards
Many people will think about how to earn the most possible credit card rewards either in the form of cashback, points, or through travel. Rewards in credit cards are a great way to earn the money back that you have spent.
It is easy to buy something and earn points, even if that extra charge affects your credit ratio. It is attractive to earn a balance by earning credit card rewards, but the negative effects of having too much debt on your credit score will quickly neutralize those savings.
Opening Retail Cards for Discounts
Having too many credit cards is an easy way to overspend and fall into the debt cycle. Even if you are a sensible spender, applying for too many credit cards may allow the lender to think otherwise.
Many hard inquiries on your credit report and fresh credit accounts can look like you are desperate to cover your bills.
In shopping, if you want to save your money, then look for sales and offers other than credit card promotions. If you want to shop at one store, retail cards will make sense.
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Key Takeaway
It will take years to get your credit score to where you want it to be. It helps to take steps like checking your credit report and credit score regularly, paying your bills on time, keeping your credit card balances low, and avoiding credit debt.
You can make some credit score mistakes but not often. Building credit is a long-term process. As you build and maintain your credit history, you can see many benefits, which include cheaper financing, low auto, and home loans, and low-interest rates.
Frequently Asked Questions
What are the three most common mistakes on the credit report?
- Wrong Address: 56%
- Misspelled Name: 33%
- Wrong Name: 17%
What should not be on the credit report?
Your credit report will not provide your marital status, any medical information, or transactional data, income, bank account balances, criminal records, or your educational qualification. It will not include your credit score.
What does a credit report include?
Your credit report contains personal information, credit account history, hard and soft inquiries, and public records. This information is reported by the credit card issuers and lenders to the credit bureaus.
