Building your credit score takes time, patience, and loads of hard work. Wrecking it, on the other hand, is a cakewalk.
With just a couple errors you can see your credit score plummet into the danger zone, where it can remain for YEARS if not taken care of. Once your score drops, you can be stuck in credit score limbo. The sad thing is, most consumers aren’t even aware of the damaging effects their decisions can have on their score…. until now!
Here are 7 key mistakes to avoid when it comes to your credit score:
1. Making Late Payments
This one seems obvious. Just 1 or 2 late payments can be devastating to your credit score. According to a recent Credit Karma Analysis, consumers with excellent scores (750 or higher) pay 99.9% on time. Consumers with fair scores (640 to 699) still pay 99% on time. With that being said, about a third of Americans have a debt that is in a collection.
What can you do?
With today’s fast pace world, it’s easy for a bill to slip your mind here and there. Be sure to set reminders on your phone or sign up for an autopay feature to make sure you’re always current with your payments.
2. Applying for Tons of Credit/Constantly Pulling Scores
Just last month I was at the car dealership looking for a new vehicle. I had barely even looked at any cars and already the dealer was asking for my social security number to pull my credit score. He told me the banks would “fight over each other” to give me the best rate for my new ride. While this might sound intriguing to most people, to me it sounds like my credit score is going to be run 30 times. Needless to say, I didn’t let them run my credit and kept shopping until I found the car I desired.
Consumers don’t realize their scores will drop around 3-5 points every time a hard inquiry hits your credit report. This includes applying for loans, obtaining new lines of credit, and checking credit scores. Let’s take my trip to the Chevy dealer for example, and let’s say they had 5 banks run my credit. Boom! Each of my scores could have just dropped 25 points!(and that’s if I only went to one dealership).
When you have a bunch of hard inquiries on your credit, it will bring your scores down and appear you are desperate for credit. This is something lenders and creditors do not like to see. On top of that, any new credit lines will initially decrease your score. Only after several months of on time payments will it bounce back and start generating positive credit.
What can you do?
Limit your inquiries. Don’t create a hard pull for your credit when you don’t need it! Most places like car dealerships want to run your credit as soon as you walk through the door just to get you approved. Shop around first and make sure you know what you want at the price you desire(This goes for homes too). Once you find something that fits your needs, then pull your score. Make sure they only pull it a couple times. Remember they want your business. Most places will still work with you when you refuse to let them shogun your credit. Try to have only 1 to 2 hard inquiries a year.
3. Closing Old Credit Cards
When it comes to credit cards, the longer your history, the better. Some consumers tend to treat their old credit cards like old furniture. “We’ve had it for years, it’s brought us lots of good times, but it’s old. We want that shiny new account!” Closing old credit cards just because of their age will instantly decrease your score. In fact, 15% of your credit score is calculated based upon the length of your credit history. The more accounts that get closed, the more credit utilization is dependent on your open accounts.
What can you do?
Instead of closing old credit cards, leave them be until they become inactive. It’s best to cancel newer credit cards rather than old ones. As said above, older credit cards carry more weight when it comes to calculating your credit score.
4. Maxing Out Credit Cards
Your credit card activity is a big factor when it comes to being approved by lenders. Based upon activity on your report, lenders can tell how well a consumer uses credit. When your accounts are reporting as maxed out lenders tend to get a little weary.
The more money you charge on your card, the less likely it is you will be paying the debt. When a card becomes maxed out it can take an eternity to pay it off. You can find yourself be paying boatloads of dough just on interest. This is when most consumers find themselves missing payments. After a few missed payments and the account may get sold to a collection (which with be devastating to your credit).
What Can You Do?
Avoid maxing out your credit cards. Maxing out the card will have you swimming in debt and interest. Instead, try to keep the utilization rate between 1%-30% of the high credit limit on the card. If you pay on time and keep a balance in this zone, your credit scores will likely improve. This shows that you know how to correctly use a credit card and will reflect on your score. Always keep this in mind so you can avoid those impulse buys and save money. You can also pay more than once a month to show that you are determined to drop that balance. After you’ve had the account for some time (and with positive history), request a credit increase. This will make it easier for you to stay within that 1%-30% margin, and keep you away from that high credit limit.
5. Making Minimum Payments
Plain and simple, making minimum payments will show the credit bureaus you take too long to pay off debt. You’ll also be paying a mountain of interest. So although the payments are smaller, you’ll actually be spending more.
What Can You Do?
Simple, pay off more than minimum payments. Set monthly payments to double the minimum if you can afford it. When you find yourself with extra cash, throw it towards your payments. The sooner you pay the account off, the sooner you can cross off this expense and put more money into your wallet.
6. Charging Major Expenses on Cards for “Rewards”
We’ve all seen it. Almost every major credit card has “rewards”. Charge x amount to the card and get a bunch of airline miles or points towards redeeming a certain “prize.” It’s so easy to take their bait when they’re waving a “free” vacation in front of your face. The truth is, whatever “benefit” you get from these cards will be offset by the amount of interest you will be paying.
What Can You Do?
Don’t take the bait unless you already have the money to pay it off immediately. You’re better off saving up and paying for a vacation, and it’ll probably cost less in the process.
7. Not Monitoring Credit
The last and one of the most important factors. 1 in 4 consumers have errors on their credit reports! With identity theft being the number one crime in America, it is insane to not sign up for a credit monitoring service. (if you haven’t read last weeks blog on data breaches, you can do so here)
What Can You Do?
Perform routine checkups on your credit. Get free credit reports online to make sure there is no fraudulent activity occurring on your account. www.AnnualCreditReport.com supplies you with one free FICO credit report per year. Check your credit from consumer sites like www.CreditKarma.com and www.CreditSesame.com.
Be sure to take the next step and enroll in a credit monitoring program. Fill out the form below and have Better Qualified go over a credit report with you. We’ll enroll you into our own credit monitoring program with BQ911.com. Plans start as low as $9 a month. Get protected and take control of your credit before it’s too late!
Fill Out The Form for a Free Credit Consultation