Honesty time: Even though I have my financial act together now, I've massively struggled with credit for most of my adult life and made a ton of credit score mistakes along the way. Here's the DL on that story:
- I developed a nasty shopping addiction in college.
- Graduated in 2009 with over $10k in credit card debt and (ironically) zero student loan debt thanks to the generous gift of a college education from my parents.
- I paid off all that debt while living and working in NYC.
- Then when I bought and renovated my first home in 2013, I got into another $8k of credit card debt from a runaway renovation.
- I paid off that debt in under 90 days back in 2015.
Whew! But through all those credit ups and downs, I wasn't really sure how it was affecting my credit.
Truly, I didn't become educated on your credit score and how it can affect your life until I started writing this blog in 2012. Other than co-signing someone else's loans (#4), I've made all the mistakes mentioned in the article below and then some. So, here's what I recommend you avoid if you want to have stellar credit and the ability to get approved for any type of large loan (home, business, auto) you may need in the future!
The 6 Biggest Credit Score Mistakes
#1 – Closing Out Old Cards…And Opening New Ones
You’ve likely heard the phrase “use it or lose it” right? Well, that is the exact opposite of what you should be doing to maintain a healthy credit score. Since credit scores include factors such as average age of accounts and debt-to-credit ratios, keeping older credit lines and cards that you have paid off open will help your overall credit utilization.
It looks much better to potential lenders to see that you have kept a card a longer time and with a lower balance than to only see the shiny new store credit card you opened to snag a deal on a big ticket item.
When I paid off all my debt (the first time when I lived in NYC), I got so excited to be debt free and closed out all but two of my cards. Much to my chagrin, my credit score went down even though I'd just paid off all my debt. Pay off your cards, but keep them open so your average “age of credit” is higher. Once you close…the age on those accounts goes away!
#2 – Having High Credit Utilization
Ideal credit utilization should be below 30% of your total credit limit for the card – meaning it may be a good idea to whittle down the balances of cards over that limit first. Another way to decrease your utilization (without paying off a big chunk)… If you’ve had the card for a long time you can also try calling your lender to see about a limit increase.
#3 – Having Too Many Hard Inquiries
If you’re applying for every credit card offer you get in the mail – you may be in for a rude awakening when you look at your credit score. When you apply for credit products, lenders will typically make a hard inquiry on your account. Having too many of these inquiries in a 6- or 12- month timeframe can be a major red flag to potential lenders, as it indicates you need money and have a hard time paying down debts.
#4 – Co-Signing For Loans
I don't recommend mixing money and friendship. Family…well, maybe. It depends on the situation. You might feel like you’re helping your family member/friend/college roommate out, but co-signing can end up being a financial misstep for both of you. When you’re co-signing a loan for someone, you’re essentially saying that if they aren’t able to make the payments then you will take responsibility and pay.
That’s a big commitment even without considering how it will affect your credit.
#5 – Making Late Payments
Don't EVER get comfortable paying late on a credit product. Even though you may not be charged a late fee right away, your on-time payment percentage will suffer the longer you wait.
A good way to combat forgetting about your payments is to set up reminders or automating your minimum payment for the same time each month. You can always make additional payments if you want to put more towards a balance, but automating the minimum will keep you from the late payment repercussions.
Related: The Debt Master Plan
#6 – Not Keeping Up With Your Score is One of the Biggest Credit Score Mistakes
When it comes down to it, the best thing you can to do improve your credit score is to be aware of how your credit decisions are impacting it. If you know that your biggest factor is the average age of your accounts, you can be conscientious to avoid opening new credit products. It is also important to make sure that your score is accurately reflecting your credit history. Inaccuracies can be warning signs for fraud or identity theft. (Here's what to do in the event your identity is compromised.)