When it comes to credit scores, just about everyone knows what patterns or behaviors to avoid if you are trying to keep your score in a good range. But there are lots of things that hurt your credit score.
In order to avoid some of these simple mistakes and keep your score at a decent level, it’s important to understand how your credit score is calculated. Credit scores are computed by considering several factors within an individual’s overall credit report. These items are listed below along with the percentage of your score they make up.
Each of the three major credit bureaus (Equifax, Experian and TransUnion) has their own complicated equation to arrive at your overall credit score, but they all use the above mentioned categories to determine what your score is.
By having the knowledge of what information is used to calculate your score, you now have an important tool to keep your score at a healthy level. There are many common mistakes that a lot of people make that can have huge impacts on their score. Below is a list of the top 10 mistakes that should be avoided.
1. Missing or late payments
It may not seem like the end of the world to miss one payment here and there, or to send in a payment later than the due date. But this kind of behavior can be detrimental to your credit score. Because payment history makes up the largest portion of your credit score calculation, it is critical to make your payments every month and always on time.
2. Paying only minimum balances
Sometimes life can throw us a financial curveball, and it is difficult to pay all of our bills each month. But even if you do somehow find enough in your checkbook to pay everything, if you are only making the minimum payments to your credit cards, you may be negatively affecting your credit score.
Interest and monthly fees can often add up to more than the minimum monthly payment due, which only increases your overall debt owed, even with monthly payments over time. The best bet is to keep your balances manageable and as low as possible. This way your monthly payments actually put a dent in the overall balance owed, thus reflecting positively on your credit report.
3. Maxing out your credit cards
Your credit score is hugely impacted by your total balance owed to each of your creditors. In fact, as stated above, 30 percent of your score depends on the total debt to credit ratio that you have on your credit report. If you have a credit card with a $5,000 credit line, and currently have $4,800 as your balance owed, this will cause your credit score to drop slightly. However, if you only owed $300 on that same card, it will improve your overall credit rating.
4. Having too many open credit accounts
Having a few open credit accounts is a good idea, but having too many can hurt your score. This will usually occur due to the fact that the more cards you have available to you, the more likely you are to run up balances on them. This will ultimately increase your debt-to-credit ratio, which can then lower your score. It’s not necessarily a bad thing to have multiple accounts open, as long as you are careful to avoid carrying high balances on all of them.
5. Closing accounts when they are paid off
Many of us are inclined to close an account once we finally are able to pay it off in full. However, we just learned above that credit history is a big factor in determining your overall credit score. Oftentimes it is more beneficial to leave accounts open once they have been paid off. This increases your overall length of time with a creditor, and therefore can help your score.
6. Not using credit
Many people try to avoid the common credit card woes by paying for everything with cash. However, this ultimately has a negative impact on your score because it does not allow you to build a sufficient credit history. Because the length of your credit history makes up a total of 15 percent of your overall credit score, establishing some kind of good credit early (and keeping it in good standing) is key to keeping your credit score in the right area.
7. Not resolving old debt
Sometimes it is easy to let old debt fall through the cracks. Many of us have old cable, utility or medical bills that we have forgotten about or maybe even ignored. But the fact is, these debts do not simply go away because we want them to. While these types of companies usually do not report any of the good payment patterns you have had in the past, you can bet they will report the negative information to the three major credit bureaus as well as send your account to a collection agency.
Additionally, what can sometimes happen if you then choose to ignore the collection agent, is they, too, can report this behavior negatively to the credit bureaus, resulting in numerous negative marks on your credit history for the same debt.
It is always best to resolve this type of old debt before it gets out of hand. Allowing it to remain on your credit report could cost your overall credit score as much as 100 points.
8. Multiple inquiries
Each time you fill out an application for a credit card or other line of credit, there is an inquiry posted onto your credit report. A few inquiries over a long period of time is just fine, but multiple inquiries for the same type of credit (auto loan, credit card, etc.) can be a red flag for the credit bureaus. This will subsequently cause a drop in your credit score of anywhere from three to five points per inquiry, and these remain on your report for two years.
Another thing to watch out for with regards to inquiries, is avoiding those enticing special offers that some companies try to lure you in with. Have you ever been checking out at a department store, and the cashier asks if you want to apply for their card to get an additional 10 percent or 15 percent off your total? While this may seem like a nice gesture, and may even be tempting to accept, remember that each time you go for one of these deals, there will be an inquiry posted onto your credit report.
9. Private or government liens
Whether you owe back taxes or have some other type of judgment against you, having an outstanding lien can be very damaging to your credit score. Similar to bankruptcy, these types of debt remain on your credit for seven to 10 years if left unresolved. It really doesn’t matter if you owe $100 or $100,000, the simple fact that there is a lien on your credit report will lower your overall credit score.
10. Not keeping track of credit report
This may be the single greatest mistake that many of us make when it comes to keeping a good credit score. Because the score itself is based on the information contained within your credit report, it is vital that the information in your credit report be checked often for mistakes or inaccuracies. When these errors are discovered, take care of them right away by contacting the individual organization reporting the error or by requesting it be removed directly from the credit bureau reporting it.
The Fair Credit Reporting Act was put into law in 1970, but revised in 2003 to allow each individual the opportunity to receive their credit report for free once each year. This was done after the Public Interest Research Group released the findings of a study which showed that approximately 80 percent of all credit reports had at least one error on them.
Because this law was put into effect to allow us to view our credit report annually at no cost, we should definitely be taking advantage of the opportunity to clear up any mistakes, which will ultimately help our credit scores drastically.
Your credit score plays an incredibly important role in your overall personal economics, so it is always a good idea to be on top of it. Now that you know some of the mistakes that can lead to a less than great score, you can try to start addressing some of the issues you may have forgotten in the past. With a little work, and a little knowledge, you can drastically improve your overall credit score and credit worthiness by following these few simple reminders.
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