A high credit score is key to getting lower interest rates on your home loan, car loan, credit cards, and even lower insurance premiums. Working to improve and maintain a good credit score is a lot like trying to lose weight and being able to maintain it. It’s easier for some people and next to impossible for others. Fortunately for you, we have compiled a list of common mistakes people make, because making these mistakes can be costly. This is why we have also included simple strategies on how to avoid them.
Credit Mistake 1: Maxing out a credit card
Maxing out a credit card refers to reaching your credit limit without any more credit left to use with the card. Credit cards give you a specific limit on how much you can spend with them however, that doesn’t mean you should spend all of it. So, it’s best to not go over the limit. When you max out your credit cards, you look risky to lenders because your utilisation ratio would be high. The best plan here is to keep your credit use rate low. If you have had the same credit card for a long time, your credit limit may not reflect your higher income. As a general rule, the lower the use of your credit, the better.
Credit Mistake 2: Closing an old account
So, you’ve finally paid off that account that has been nagging you for several months. Your first thought may be to say “good riddance!” cut up the card and close the account. But the truth is, closing an account can lower your credit score. First, you’ll have a smaller amount of available credit and you’ll be making your credit history with that card go away a lot sooner.
Credit Mistake 3: Applying for too many things in a short amount of time
When you apply for any type of credit, whether it’s a new card, a car loan or a home mortgage, financial institutions will perform what’s called a “hard credit inquiry” to look at your credit history and make a decision on what you’re applying for. A hard inquiry can stay on your credit report for about two years and may decrease your score by a few points, but you can regain those points over a matter of months with responsible credit management.
When you’re prequalifying to see what kind of rate or offer you could get for a loan, that’s a “soft inquiry” and it shouldn’t affect your score. Hard inquiries occur when you apply for something that requires payments, whether that’s a loan, credit card or a lease for a new apartment.
What messes up your credit is applying for too many cards or loans in a matter of weeks or even months, which sends a red flag to lenders and could result in a significant negative impact on your score.
Credit Mistake 4: Not using credit at all
Some people are scared of debt to a point that they avoid using credit altogether. What they don’t realise, however, is that not having credit can hurt your credit score. Credit will be needed for a major transaction at some point in your life. If you don’t use credit at all, you won’t have any credit history. And with no credit history, you’re not going to get the best terms possible and may even have trouble getting approved.
It is easy to build a credit history, you only need one transaction a month to have activity reported to the credit bureau. An easy tip is to automate one bill each month. For example, you could set up the automatic payment of your data bill with your credit card. That amount would appear on your statement balance every month, which is reported to the credit reporting agencies.
Credit Mistake 5: Making late payments
The most important factor in your credit score is the presence or absence of negative information. As a result, one of the fastest ways to turn a score of 750 to maybe that of 600 is missing payments, even if the missed payments are simply an oversight. For example, if you have a clothing account that you need to pay every last day of the month and for some reason, you choose to only do so the following day, your credit score could take a serious hit.
Set up automated payments for bills to serve as a safety net in the event you ever forget to make a payment by the due date.
Additionally, pay close attention to your mail, email, and voice mail in case a creditor ever tries to contact you regarding a past due balance you may have overlooked.
Credit Mistake 6: You became a co-signer
This doesn’t often seem like a big deal when it happens but it is. When you co-sign, you are automatically responsible for the debt. That means the debt will likely appear on your credit report, and it will look like you owe the money (because, well, you do). Your total debt will look higher. And, if payments are missed, your credit score will be harmed. Be very careful before co-signing for anyone. Banks generally ask for a co-signer because the individual cannot qualify for the credit on their own. You will likely be taking a big risk if you do sign on the dotted line.
BONUS Mistake: You don’t vote
Adding your name to the electoral register and keeping the information up to date helps credit companies confirm your identity. It gives lenders confidence that you are reachable at the address listed.
