Avoid making these five mistakes to keep your credit score in the best place possible.
Your credit score is arguably the most important grade you'll ever receive in life. It dictates which credit cards you can have, the interest rates you get on your loans, and it can even affect the jobs you qualify for. If you want the best financial opportunities, you have to keep that score as high as possible.
It takes a while to establish a strong credit history, but a single bad decision could demolish it in one day. Here are five of those credit mistakes you don't want to make.
1. Paying bills late
Your payment history is the most important factor in determining your credit score. It tells lenders how financially responsible you are and whether you're able to support your lifestyle.
A single late payment may not seem like a huge problem, but it is. A 30-day late payment could drop an excellent credit score by over 100 points, according to FICO data. And the consequences are even more severe if you have multiple late payments or a 60- or 90-day late payment.
Some card issuers may also charge you a penalty APR, which causes any remaining balance to accrue interest more quickly. Once you've been assigned a penalty APR, it's difficult to get it removed and some card issuers will leave it in place indefinitely.
If you have difficulty remembering to pay your bills on time, see if you can set up automatic payments or set yourself reminders to pay your bills. Reach out to the creditors you owe if you know a bill is going to be a few days late. Explain your situation and request that they don't submit this information to the credit bureaus. They may comply if you've been a responsible payer up until that point.
2. Only making the minimum payment on your credit card
Making the minimum payment on your credit card will prevent the card issuer from reporting a late payment, but any remaining balance will begin to accrue interest.
Credit cards can have APRs of 30% or more, and this can cause your balance to balloon quickly. Once they get into credit card debt, many people have difficulty getting out again. This can cost you thousands of dollars and may lead to you falling behind on your other bills.
Carrying a balance also raises your credit utilization ratio. This measures the amount of credit you use each month versus the amount available to you. Ideally, you should keep this under 30%. A higher credit utilization ratio indicates you may be living beyond your means and it makes lenders hesitant to work with you.
If you already have credit card debt, do what you can to pay it off. Consider transferring your balance to a 0% intro APR card to slow its growth and reduce your discretionary spending. Put all your extra money each month toward your credit card debt until it's paid off. If you get a yearly bonus or a tax refund, use that for debt repayment as well.
3. Maxing out credit cards
Maxing out your credit cards is problematic for two reasons. First, you'll have a high credit utilization ratio. This will deter other lenders and credit card issuers from working with you because your heavy reliance on credit indicates that you may struggle to pay back any money they lend to you.
Maxing out your credit card could also cause you to incur a penalty APR, which, as I mentioned above, causes your balance to accrue interest faster and can be difficult to impossible to get rid of.
4. Applying for new credit often
Every time you apply for a new loan or line of credit, your lender will do a hard credit check on your credit report. This drops your score by a few points, but that's not an issue if you're approved because your new lower credit utilization ratio will counteract this. But if you apply for new credit frequently, those small credit hits will begin to add up over time.
Credit scoring companies understand that people like to shop around for new credit, so all credit inquiries that take place within a 30-day period are usually considered a single inquiry. If you intend to shop for a new loan or credit card, make sure you get all of your applications in during this window so a second credit inquiry doesn't show up on your report.
5. Closing old credit cards without considering the consequences
Your average credit account age also affects your credit score. A longer credit history gives lenders a better understanding of how you handle your money, so they can make more informed decisions.
When you close a credit card, that account is removed from your average credit age calculation. If you've had the card for a while, this can lower your average account age significantly and it may hurt your credit score.
Of course, sometimes it may still make sense to close the card. If it has an expensive annual fee and you rarely use it, it's probably worth the slight credit hit to get rid of it. But if the card doesn't have an annual fee, you may be better off keeping it in your wallet even if you never use it.
Avoiding these five pitfalls can help keep your credit score high and lenders eager to work with you. If you have made any of these mistakes, take steps now to correct them if you can and be mindful of their consequences moving forward. It may take a while, but you can raise your credit score over time, no matter how low it's fallen.
