A good credit record and score are both important if you want to borrow money at a low interest rate for a personal loan or a home. But sometimes even the smartest borrowers make mistakes when it comes to their credit.
Here are seven mistakes you should try to avoid:
1. Ignoring your credit report
It’s best to check your credit report at least once a year to make sure there aren’t any mistakes or fraudulent accounts. There can be minor errors, such as incorrect personal information or the misspelling of addresses and names. Or there might be major errors, such as accounts that don’t belong to you or incorrect payment history.
You can get your report from the two major credit bureaus (Equifax and TransUnion) once a year for free. You can obtain your report from one bureau first and wait six months to get the report from the other bureau, which may help you spot any problems ahead of time. And remember, checking your own report doesn’t hurt your score. You should also check your score regularly because you may be able to request a lower interest rate or qualify for a better rewards credit card from your financial institution.
2. Avoiding credit
Not having credit means it’s nearly impossible to go into debt, but it’s also impossible to buy a home or a car without it unless you intend on paying for either one in full. While it’s nice not to have debt, it can take years—or even decades—to save up for larger purchases. Even getting an apartment can be a problem if you don’t have a credit record since most landlords will request a copy of your credit report.
As long as you make payments on time and pay off your credit card balance in full, you’ll be fine. Being disciplined will help prevent you from being irresponsible and making foolish decisions with your money.
3. Maxing out your credit cards
Credit card issuers give you a certain amount of credit. But just because they set a certain limit doesn’t mean you should use almost all of it (or the entire amount) every month. If you do, you will have a higher credit utilization ratio. And unfortunately, that can be a bad thing.
For example, if you have a card with a $1,000 limit and you spend $900 a month, your credit utilization ratio is 90%. If you have two credit cards and the combined limit is $2,500 and you spend $2,000 a month on both, the credit utilization ratio is 80%. In an ideal situation, your credit utilization ratio should be around 30%. Having a high credit utilization ratio can have a negative impact on your credit score.
4. Making late payments or missing payments altogether
If you forget to make a payment or make a late payment, neither is good for your credit. You should ensure you make the minimum payment at the very least. By setting up automatic bill payments, you can make sure you never miss a payment.
There’s also a common misconception that carrying a balance is good for your credit score. In fact, it can actually hurt your score because it may impact your credit utilization ratio. The best thing to do is pay off your balance in full every month. Not only can it help improve your score, it will also save you from having to pay interest on your purchases.
5. Needlessly closing old accounts
Many consumers close credit cards they no longer use. However, this isn’t always a good idea because lenders look at your credit history to see how much experience you have with credit. If you close your oldest cards, they won’t show up on your credit report after a few years. Then it may look as though you don’t have much of a history using credit.
While a closed account will remain on your credit report for a number of years, it won’t hurt your score in the short term. To be on the safe side, it’s best to keep a card you no longer use open. If it’s a no-fee card, it doesn’t cost anything to leave the account open. If you have a card with an annual fee, you can ask your financial institution to switch to a no-fee version and the account history is transferred to the new card.
6. Applying for too much credit too quickly
It can be tempting to apply for a new credit card, especially when there’s sign-up bonus offer and the annual fee is waived for the first year. These cards also often have a minimum spend requirement in order to get the sign-up bonus.
If you apply for too many new cards in a short period of time, your score will take a hit and it may appear to lenders that you’ve become more of a credit risk. You’ll also need to do a lot more spending to meet the minimum spend requirements, which could lead to trouble down the road if you’re juggling multiple accounts don’t have the money to pay off your balances in full.
7. Overanalyzing your credit score
Although applying for a credit card or a loan will cause your score to go down, that’s what happens to everyone. One month it might be 850 and the next it’s 775. It’s nothing to worry about because a score that’s 760 or higher is still considered to be excellent.
But if you constantly check your score, you might become obsessed. It can also be confusing if your score bounces around from month to month for no reason, especially if you haven’t applied for any credit over that period of time.
If you do apply for more credit and see a drop in your score, it should bounce back as long as you use your new credit responsibly.