There’s a lot of credit misconceptions and confusion out there about what actually increases your credit score and what decreases it.
I want to share my top 10 things that people do that isn’t ideal for their credit rating. In fact, some of these things hurt your score in a big way, dropping your score down hundreds of points and it can even prevent you from getting a loan, like a mortgage let’s say.
Don’t ruin your credit! Here are my top 10 credit mistakes people make.
Here they are:
Not actively working to get your credit score to 800+
I think everyone should build their credit scores to at least 800 and not be satisfied until you reach at least this level. With a credit score of 800+ (850 being the maximum score), you will receiver the most favorable interest rates when you apply for any type of loan. This means you will save money not only today, but in the long term, because the cost of borrowing (what you pay to borrow money) can be considerably lower than if you had a lower credit score.
When you look at a big loan like a mortgage, you will be paying tens of thousands of dollars just in interest rate alone to borrow this money. You will get the best interest rates when your credit score is high, and a small percentage decrease in interest rate can save you tens of thousands of dollars over the life of your mortgage loan.
It does take time to build your credit score high. You should be working on it now regardless, however if you plan to get any type of loan in the near future, or plan to buy a home in a few years, make sure you work really diligently on your credit right now. It’s just a matter of consistent good actions and time, and your credit score will rocket its way up.
To learn how to increase your credit score quickly, you can read this tutorial.
Keeping a lot of debt on your credit cards
maxing out your credit cards (or coming close to it) has two major negative effects. First, your credit card interest rate is likely very high (maybe 20%). This means you are paying a lot of money in interest alone.
Second, your credit score is heavily determined by how close you max out your available credit. 30% of your credit score is determined by credit utilization. It means it you have $50,000 in available credit to use, and you’re using let’s say $45,000 of it, you’re credit utilization rate is 90%. And this is really really bad for your credit score. You want to aim for a credit utilization rate of 35% or lower. The lower the better.
You’ve closed off old accounts
Your length of credit history will play a 10% factor in your credit score. If you have credit cards dating back 10 years or a credit line that’s 5+ year old for example, don’t close these accounts off, even if you aren’t going to use them anymore. When you close these accounts off, you are essentially eliminating them from being included in your credit score.
Creditors want to see a history of responsible credit use. Old credit accounts will help boost your score.
You only have one or two types of credit
You want to vary the types of credit you have. Ideally, you’ll have a good mix of credit cards, personal loans, a mortgage, car loan, line of credit, etc. You don’t need everything and don’t take money out for the sake of varying your credit. However, your score will improve when you have a variety of different credit. This can take time to “get”. I personally would apply for various types of credit as long as it does not cost me any money in interest. For example, I could apply for a line of credit if I didn’t have one. This type of credit typically does not cost any money to “open”. I can use it and pay it off on time and won’t be charged a penny.
You want to eventually have several types of credit. It’s not completely necessary but it will help you get the highest credit score possible. If there is an opportunity to get a new type of credit that won’t cost you money or hurt you in any way, then it’s something worth considering.
You skip or miss a “small payment” and think it’s not a big deal
Sometimes you might see $21.47 on your credit card statement and think it’s not that big of an amount and don’t pay it. This is a massive mistake. Even though the dollar amount is low, it will get recorded as a missed payment. Your payment history is the most important factor that determines your credit score. You absolutely need to make your payments on time every month. This is the most important thing creditors look at when they think about loaning you money.
Always try and pay your credit card or any loan statement in full. If not, at the very least, make the minimum payment amount so your credit report will record that you’ve made a payment that month.
You take on way to much debt
Virtually everyones credit woes start when they take on way to much debt. I believe most people would have good to great credit if they weren’t in debt or struggling to pay things off. It’s only when you get behind on payments that people seem to really take a credit score plunge down into the drain.
If you’re newer to credit or don’t really have too much debt, please don’t borrow more money than you can pay back. It can take a few years to build your credit score back up to a reasonable level. And it’s a difficult process for most people. Buy a car that you can afford. Buy a house you can afford. Only charge your credit card what you can pay back on it each month. Don’t take that vacation that’s 3x what you should be taking. It’s common sense but so many of us make the mistake of borrowing too much money. We get in trouble because we can’t pay it back on time. And financially, we ruin our credit.
You only use one credit card
I personally believe you should have several credit cards. I probably have maybe 10 or so. I don’t use them all, however this does a few things for me benefically. First of all, it gives me MORE credit to use. Not that I will use it, but in terms of increasing my credit score, it’s done excellent. I may only charge a few thousand dollars on my credit card each month. But the amount of credit I have available on my credit cards could be $50,000. This means Im only using a small percentage of my overall available credit, and this helps keep my credit score high.
The second reason why you want many credit cards is because you can build credit history over several cards at the same time. This should help your score in the long run, because it shows you are using several credit cards responsibly rather than just one credit card.
If you’re new to using credit cards to build credit history, you can read this tutorial on how to build credit with credit cards.
You use debit cards or cash only
I strongly believe using just debit cards or cash only is a bad financial move. The only time I recommend using cash only or just debit cards is if you are terribly irresponsible with credit and if you had a credit card you’d use it uncontrollably. But let’s be honest, this is a small amount of people. And if this is you, it’s not the credit card, it’s just YOU. I’ll bet you behave impulsively and irresponsibly for a lot of other things in life too.
For the vast majority of people, credit cards have MAJOR benefits. It’s extremely convenient for buying things, especially online. And the best part is you can earn reward points for free flights, hotels, vacations, swag, gas, etc. You want to find that one credit card that matches your lifestyle right. And make sure that card earns you serious rewards. And use that card for everything, pay it off on time and in full every month, and you will never pay a single cent of interest for using this card that can get you on let’s say one free vacation every single year.
You allow items to get to “collection” status on your credit report
At all costs, avoid any item going into “collection” status on your credit report. This will absolutely hurt your credit score. And when creditors see this, they won’t like it. Even if the problem isn’t your fault, sometimes you may be better off paying off this debt (so long as it’s a reasonable amount) and taking the hit rather than having it go to collection. Collections really really make your credit report look bad. It’s much better to deal it with now rather than have it get reported as collections and then try to remove it afterwards. Take proactive action to solve the problem. And worse comes to worst, I feel it’s better to pay the bill than have it show up on my credit report as a collections item (again, as long as the amount is within reason).
You don’t check your credit reports or your credit score
You should be checking your credit reports at least once per year to look for any errors or inconsistent information. It’s been shown by the FTC that 20% of people have some type of error on their credit reports. Also, you should constantly be monitoring your credit score. Especially if you are actively trying to improve it right now. You want to know how your financial behaviour is affecting your score and how it changes with the things you do.
Learn how to get your free credit report and score here.