Your credit score is important, often affecting areas of your life that range from where you live to how much you pay for auto insurance. More importantly, it usually determines whether or not you’re approved for credit, and could cost or save you thousands of dollars, as it’s often used to figure out how much you’ll pay in interest.
While building a great credit score is probably easier than you expect, it’s unfortunately also a lot easier to kill your credit health than it is to improve it. Consider your payment history for a moment – even if you made 50 consecutive payments on time, a single late payment could drop your score drastically and affect your credit health for years to come.
With these thoughts in mind, let’s go over a few key credit mistakes to avoid and some tips for keeping your credit in tiptop shape:
1. Maxing Out Credit Cards
Most people know that maxing out their credit cards isn’t the best for their overall finances because, well, it involves spending a lot of money. However, potential lenders also care about how much you’re charging to your card, as the more you spend, the more likely you’ll be unable to repay that debt. For this reason, your credit card utilization rate, calculated by dividing your total credit card balances by your total credit limits, typically has a high impact on your score.
Instead … try keeping your utilization rate between 1 and 20 percent. This will show lenders that you’re using credit, but don’t rely on it.
In order to lower your credit utilization, do whatever you can to keep your balances low. If this simply involves spending less money on frivolous purchases, great! Cutting out those impulse buys will simultaneously save you money and lower your utilization rate. However, if you’re using your cards to pay for purchases you really need and are still using up too much of your credit limit, try making payments more than once a month. Alternatively, you can pay for some of those necessities with cash. Lastly, if you haven’t received a credit limit increase in a while and have a good history with your creditor, it doesn’t hurt to proactively request an increase. Just be sure to ask whether this will result in a hard inquiry, so you can make an informed decision.
2. Making Late Payments
We touched on this earlier, but this factor is so important that we’ll bring it up again: Your on-time payment percentage could make or break your score. Lenders really want to see that you’re a reliable borrower who will repay debts in a timely manner. Consider this Credit Karma analysis: While consumers in the “excellent” scoring range (750 or higher) typically pay their bills on time 99.9 percent of the time, even the average consumer who falls into the “fair” range (640 to 699) has a respectable 99 percent on-time payment record. The numbers paint a stark picture – paying most of your bills on time isn’t good enough – just one or two late payments could have a drastic effect on your score.
Instead … get those payments in on time as often as you can. If you’re the forgetful type, set up a calendar reminder. Personally, I like to pay my bills whenever I get paid (twice a month). That way, I get payments in on a regular basis and know I have the money to back them up.
3. Applying For Tons of Credit
Simply put, racking up handfuls of hard inquiries by applying for lots of credit could make you look desperate for credit – a trait frowned upon by potential lenders. While one or two hard inquiries each year may not affect your score by much, a ton of hard inquiries can do some significant damage.
Instead … limit your applications, and try only applying for credit that you need. If you’re looking for the best auto or home loan rate, shop around over a short period of time – within 14 to 45 days. By applying for the same type of credit line each time during that period, some scoring models will recognize that you’re rate shopping and may combine those hard inquiries into just one.
4. Not Monitoring Your Credit
In a perfect world, you wouldn’t need to keep an eye on your credit – there wouldn’t be any data breaches to worry about, and you could trust all the lenders and bureaus to keep your information accurate. Sadly, this simply isn’t the case. With the Federal Trade Commission reporting that 1 in 5 consumers have errors on at least one of their three major credit reports, it’s clear that one of the biggest mistakes you can make is avoiding checking your credit regularly.
Instead … perform regular checkups on your credit (and finances in general). AnnualCreditReport.com allows you to get a free copy of your credit report from each of the three major credit bureaus every year and is a great resource to take advantage of. In addition, Credit Karma, Credit Sesame and Quizzle all allow you to regularly check your credit score for free. By using these educational sites to monitor your credit regularly, you can ensure your information remains error-free and your credit score accurately represents you.
5) Be careful when closing unused credit cards: Closing credit cards that you no longer use could hurt your credit score. That’s because your score rises when you use a lower percentage of your available credit. Closing unused cards, though, could drop this percentage. Here’s an example: You have five credit cards each with a credit limit of $2,000 for a total of $10,000 in available credit. Say you owe a total of $3,000 in credit-card debt, but two of your cards have no balance on them at all. If you close those two cards, you take away $2,000 worth of available credit. It looks worse to lenders for you to have $3,000 of credit-card debt on $8,000 worth of available credit than it does for you to have that same $3,000 of debt on a more generous $10,000 worth of available credit. The lesson here? Don’t close those unused credit cards.
The Bottom Line
You’ve worked hard to build a respectable credit score – the last thing you’d want is for a few mistakes to ruin your history for years to come. As you make financial decisions on a daily basis, keep these mistakes in mind, and do your best to avoid them. You won’t regret it!
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Ron Goldstein,MBA
Certified Luxury Broker@Berkshire Hathaway Chicago & St. Petersburg
chicagoluxuryrealty.com stpeteluxuryrealty.com
(o)312-264-5846 (c)312-771-7190 (f)312-264-5746
Offices in Chicago and St. Petersburg
2014 BHHS President's Circle - Top 4% in Nation
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