A person’s credit weighs on many life events, such as buying a home, car, gaining access to education, and on and on. A high credit score opens doors to loan options that stay shut and locked to consumers with lower credit scores.
So, how should we take care of our credit, and keep our standing good and our scores high? Start by avoiding these 10 common mistakes people make with their credit.
1. They don’t check their credit reports
No news is good news, right? Uh, no! It’s estimated that as many as one in four credit reports contain errors! Creditors may report your account late when you actually paid on time, a collection charge from someone with the same name as you could end up on your report, or you could be a victim of identity theft. All of these events can tank your credit score. The last thing you want is to discover the error when you are trying to get a loan for a home or a car.
Solution: Pull a free credit report once a year. The three bureaus sponsor this at www.annualcreditreport.com. Review it closely and make sure you recognize each account, look at each balance, and note any late payments that you feel are not correct. Dispute any errors with the bureaus to get them removed as soon as possible.
There are several credit mistakes people make with their credit cards. A big one is…
2. They max out their credit cards
Many consumers mistakenly believe that, as long as they make their credit card payments on time, revolving debt doesn’t negatively affect their credit score. However, aside from late payments, credit card balances close to or at the limit are disastrous to a person’s score.
The credit scoring model looks at the ratio of available credit to used credit. The higher the ratio, the more it can decrease your credit score.
Solution: Keep your revolving debt as low as possible. It’s a good practice to never charge more than 50% of your total credit limit. For example, a person with a credit card with a $5000 limit should never charge more than $2500 on this credit card.
On the other end of the spectrum, another mistake is…
3. They close their credit cards
Consumers who think no credit cards is best may face a rude awakening when they try to get a loan. In fact, they may not have a credit score at all! This is because the scoring model must see a credit transaction within the past six months to be able to calculate a score.
Solution: Managed wisely, credit cards are a great way to build a positive credit history. Keep them open, just be certain to use them sparingly and pay the bills on time.
4. They never use credit cards
The scoring model is constantly scanning your credit activity to find evidence of whether or not you are a good credit risk. Open credit cards are only calculated into your credit score if you use them. Not charging anything, ever, does little to increase your credit score or build credit.
Solution: Even if you don’t want to worry about a credit card balance, charge gas, dinner, or clothing on your card a few times a year, and pay it off every month. This way, you build positive history and prompt payment records.
Incorrectly managing credit cards isn’t the only mistake consumers make with their credit.
5. They co-sign for friends and family members
A co-signed account carries the exact same responsibility as an account of your own. If the other party fails to make their payments on time or at all, it falls back on you, and can disastrously affect your credit score.
Solution: Say it with me: “No, I will not co-sign for you.”
6. They apply for too much credit
Overextending yourself with too many debt obligations can cause you big trouble, from not being able to meet your bills, to general worry and stress.
Solution: Make a budget and stick to it. If you use credit cards make certain you will be able to pay off the debt by paying more than the minimum payment.
7. They pay off old collections
A person trying to increase their credit score would naturally think paying off an old collection would help. It doesn’t! Collections are viewed by date of last activity (DLA). When you pay a collection that is over a year old, it brings the DLA current, and the scoring model views this as if the collection just happened. This can tank your score by as much as 100 points!
Solution: Try negotiating with the collection agency. Ask them if you pay the collection, will they give you paperwork to dispute it so it can be removed as if it never happened.
8. They fail to schedule their payments
Thinking that a late payment here and there won’t hurt your credit is a huge mistake. Even one late mortgage or car payment can decrease your score by over 50 points!
Solution: Employ a handy scheduling app to remind you when payments are due. Or, schedule them with your bank in advance to go out each month so you don’t get busy and forget.
9. They don’t realize divorce decrees don’t supersede creditor agreements
“He was required to handle that in the divorce papers,” holds no bearing if your name is still on the loan. You are still on the hook for the debt, and it will show up on your credit.
Solution: Both divorcing parties need to split the debt and refinance solely in their names. All old accounts should be closed if at all possible.
10. They believe their score is permanent
Unfortunately, many people really messed their credit up in the past, and don’t think they can ever get out from under their mistakes. We are happy to report this isn’t true!
Solution: Get your accounts current and pay them on time, keep you credit card balances low, and the scoring model will begin logging your good payment history and smart debt management. As your past missteps fade over the months, you will see your credit scores rise and begin enjoying the low interest rates that a good credit standing brings.
If you have made any of these mistakes with your credit, you are not alone. By understanding how they affect your credit, you can take steps to manage your credit more wisely. Before you know it, you will be on strong footing with a solid, stable credit history.
What was your biggest credit mistake? How did you fix it?
I’m current repairing my credit. After paying down debt, making on time payments..how long will it take to raise my credit score?