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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. Even through all those ups and downs, I wasn't really sure how my financial decisions were affecting my credit. Another secret? 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 do 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 open that you have paid off will often help your overall credit utilization.
It looks much better to potential lenders to have an older card with a lower balance than to only see the newer cards (for example , the credit card you opened in a store in order to snag a deal on a big-ticket item.)
My mistake: When I paid off all my debt while living in New York City, 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. The lesson here being to 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 – High Credit Utilization
Having multiple credit products can look good on your report (you can click here to get a free credit score/report with Credit Sesame), but not if they’re all maxed out.
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)… Is if you have a low balance card that you’ve had for a long time you can also try calling your lender to see if they'll grant a credit limit increase.
My mistake: When it comes to me and my debt, it's pretty much all-or-nothing. I'm either not using the cards, or they're all close to maxed out. This is why at any given time my score will either be very good or very bad. Now I only put on the cards what I can afford to pay, and I negotiate with my creditors for limit increases every six months or so.
#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 applying for credit products, lenders will typically make what's called 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 may be in need money, which means you'll have a hard time repaying those debts.
My mistake: Back when I needed money to fund my runaway renovation, I applied for multiple cards/lines of credit. It was out of necessity, but I'm not proud. Now, if needed, I try to limit new inquiries to one credit account a year (with the exception being the two travel cards I signed up for at the end of 2017.) I can get away with this now that I'm out of my 20's, already own a home, and am a bit more established, but it felt like I was signing up for new accounts every other month when I was broke-as-a-joke in my early 20s.
#4 – Co-Signing For Loans
I don't recommend mixing money and friendship and 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.
My mistake: This is actually the only one on this list I've never done, and no one has ever asked me to co-sign. I guess I'll have to wait until I have children to experience the joy of being a co-signer!
#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.
My mistake: With my very first credit card in college, I never made a payment on time and had creditors calling me constantly. I was only 18 at the time and knew ZERO about personal finance, but I even knew back then this was not a good feeling to have people hounding you day and night for their $$$.
#6 – Not Keeping Up With Your Score
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. Companies like CreditRepair.com can help you monitor and even challenge items that are not fair, accurate and substantiated that may be listed on your credit report. Be an aware consumer. If you know your credit score is low because of the age of your accounts, then don't open anything new for a set length of time. Make good decisions, it really can be that simple, and when it isn't, don't be afraid to call in the professionals for help.