Your credit score is a number that will follow you wherever you go. Whether you are applying for a home loan, opening new lines of credit, or venturing into a new investment, your ability to obtain credit is incredibly important. Even small, seemingly arbitrary decisions can affect your credit score. Here are ten common mistakes people make that hurt their credit.
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1. Paying credit or loan payments late
While this mistake is obvious, almost everyone makes it once. One of the main factors that a credit agency uses to determine your credit score is your past payment history. In most cases one or two late payments on your credit cards, loans, or other credit obligations will not significantly damage your credit record. But if mistakes add up, they will count against you.
2. Spending to your credit limit
A large portion of the calculation that contributes to your credit score is the debt utilization ratio. You debt utilization ratio is simply the amount of available credit you are using. If you are running up credit card debt above 50% of your limit, your credit score begins to be affected. Keeping your debts between 10-30% of your limit is advised.
3. Racking up credit card debt early in life
Most people get their first credit card while they are students in college. Getting a good start to your credit history is important, but many fall victim to poor spending habits and maxed-out credit cards. Little do they know that past credit history usually counts for as much as 35% of your credit score. Missed and late payments will stay on your record for as long as six years, when most people are starting to apply for loans for graduate school, a car, or a house. Falling into a debt trap when you’re 19 years old makes it much harder to get lines of credit later in life.
4. Closing credit card accounts
When you close a credit card account, you reduce the amount of credit you have available. Up to one third of your credit score is your debt utilization ratio. If you have to close accounts, try to close your newer accounts first, as older accounts have longer credit histories and 15% of your credit score is determined by how long you have used credit.
5. Applying for new cards often
Every time you apply for a new credit card, an official inquiry is made on your credit report. Every inquiry made on your report is another opportunity to earn a point against your score. Multiple inquiries may also indicate a credit history with mistakes and problems.
6. Ignoring or missing errors on your credit report
Check your credit report periodically to see if there are any inaccuracies. Medical payments, which tend to go through a long process before finally billing you, tend to rack up errors and/or inaccuracies. AnnualCreditReport.com gives consumers the free annual credit report they are entitled to from all three credit bureaus. If you find errors on your report, contact the credit bureaus and begin the process of ameliorating them.
7. Bouncing checks
Similar to missing credit payments, a consistent inability to make payments through a checking or debit account increases your chances of being reported to a collection agency, which will impact your ability to obtain future lines of credit.
8. Borrowing money just to boost your credit score
While to it may seem unbelievable, there are credit schemes that bill themselves as credit score boosters. Newsflash: You don’t have to carry a monthly balance on your cards to prove that you are creditworthy! Any quick credit schemes that promise anything will cost you, one way or another. Avoid them at all costs, keep your debt utilization ratio below 30%, make your payments on time, and your credit score will improve.
9. Paying your rent late
Many landlords ask for rent on the first of the month, but don’t send it for several days. While you may think that you can turn in your rent a little late (just in case), landlords can still report you for a late payment. And if you don’t pay your rent for 30 days, even if you have a legitimate reason for withholding rent, your score can drop. Anything that gets you closer to an eviction notice will hurt your credit score.
10. Not alerting creditors if you have changed names
While this may seem trivial, not notifying creditors of a name change could result in credit report inaccuracies. Bank accounts, credit applications, and other documents that become part of your credit history are integrated into your report through many different ways, some of which do not require identification like your social security number to be considered valid.
You have worked hard to build a reputation of reliability and trust with your creditors. Don’t let errors, inaccuracies, or ill-informed decisions tarnish your credit score.
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