Credit scores are a vital part of modern life. A good score can get you lower interest rates for things like mortgages, car loans, and credit cards. A bad one can put you in financial exile. Your credit report is usually one of the first things a company will request when you apply for a loan or a new card, and even when you want to rent an apartment/house or submit a job application. In this light, a bad score could come between you and the life you want. It may even cause serious, negative effects on the life you already lead.
Here are the facts: If you’ve ever had any lines of credit, you’ll have a personal score. Even if you’ve never had any, your personal rating won’t be “zero.” Instead, you simply don’t have a score and are what’s known as “credit invisible.” In short, your rating is an unavoidable aspect of economic life, and your financial decisions determine your rating.
You should be aware of how your actions can affect your score. Without your knowing it, they could potentially be damaging your rating, causing you to miss opportunities for your future.
Here are 10 of the most common mistakes and some tips to help you avoid them:
Closing Old Card Accounts – Paying off that old card you’ve had for years can feel like such a relief. To commemorate the occasion, you might want to cut it up and tell the provider to close the account. Don’t be so hasty. Closing that account can lower your score.
Closing an account lowers your available credit, and if you have other current lines that you haven’t paid yet, your debt-to-credit ratio will increase, which is bad news for your rating.
You can satisfy your urge to cut the card up, just don’t close the account officially. Even that is a missed opportunity, though. Your best bet is to keep that card, use it very occasionally, and pay every bill on time. That lets the same card that killed your score help you to rebuild it.
Opening Too Many New Accounts – Opening too many new accounts also hurts your credit score. Don’t accept every offer of a new card that somebody throws at you.
New accounts have no age to them and will undo the good foundations laid by your older accounts. With your average account age shortened and hard inquiries showing on your report for all the new accounts you’ve grabbed, your score will decrease. So unless you are going to save a significant sum of money by switching to a new card provider or transferring a debt, don’t do it.
Maxing Out Your Cards – Maxing out your cards makes you look risky to potential lenders because it will increase your debt utilization ratio. You might be keeping up with the payments and managing your maxed out cards in a way that seems acceptable, but it doesn’t matter. Your score will still be suffering.
Applying for Store Cards – Department store cards can be tempting, especially if you like shopping for clothes. Unfortunately, they usually have very high-interest rates, much higher in many cases than large providers such as Visa and MasterCard.
Then there are the hard inquiries that (again) will appear on your report from applying for the store cards. These will lower your rating, and they aren’t worth the small percentage discount you’ll receive from the store for taking their card out.
Letting Your Credit Go Unused – Many people think you need to have an ongoing balance and pay interest to build a history, but that’s simply not true. It also doesn’t make financial sense to do that if you have the means to settle your account each month. Here’s an easy way to build your history: If you have lines of credit, use them regularly. Don’t run up huge balances and only make the minimum payments each month. Instead, use your card to pay one of your recurring bills each month. Then pay the balance off in full before the balance starts accruing any interest.
Co-signing – Perhaps one of your friends doesn’t have the best history, and they’ve asked you to co-sign for a loan or rental agreement. The bottom line is that unless you trust them unconditionally, don’t do it.
You will be held liable for their debts should they fail to keep up with their payments, and you have zero recourse in court. In the worst case scenario, they could remain living in their rented accommodations or drive their shiny new car around with you paying the bill.
Not Reviewing Your Credit Report Regularly – Your report is important, and you should get into the habit of reviewing it regularly. Mistakes do occur. A few inaccurate black marks on your report spell be the difference between you securing that awesome mortgage or not.
You are entitled to receive one free copy of your report from each of the three main reporting bureaus every year. You can request them at the government-mandated website AnnualCreditReport.com. Take advantage of this facility and make sure you know everything about your report. Mistakes can take time to dispute and rectify, and as long as they’re still on your report, they negatively affect your score.
Not Considering Identity Theft – Here is another reason why you should always be on top of the information contained in your report and dispute any potential discrepancies. If an unscrupulous individual gets hold of your Social Security number, they can open new accounts in your name and run up enormous balances, for which you might be held responsible!
Genuine mistakes on your report that you can prove are wrong can be rectified. Identity theft is much more serious and more difficult to resolve. That’s why you should never give out sensitive information, such as your credit card number or Social Security number by phone, mail or email, especially if the request is unsolicited.
Making Late Payments – Many people don’t realize the significant impact late payments have on their score. Your on-time payment percentage accounts for 35% of your overall score!
Even one late payment can make you look like an unreliable borrower, so do everything in your power to keep your accounts up-to-date. If you’re at risk of making late payments because you’re a forgetful person or have other things to worry about, consider setting up automatic payments for your accounts.
Falling for So-called Credit Repair Schemes – If you’ve experienced a sudden setback, it can be tempting to reach out to companies that promise they can “fix” your credit.
These offers can seem too good to be true, and the reality is that often they truly are. Repairing credit takes time and requires you to follow a sound debt management strategy. Quick fixes are not the answer, and if you get scammed or exploited by going down that route, you might end up even worse than before.
By avoiding these ten common mistakes, you can keep your history in check and ensure you are in the best possible position financially. By taking the necessary small steps and security measures, you are making a big commitment: the commitment to invest in a happy and worry-free future.