5 Credit Score Mistakes to Avoid
Finding and using credit can be a simple process, but keeping your credit score high is easier said than done. All too often, people fall victim to some very common credit score mistakes. You, as a consumer, are a commodity. Just like any other commodity, you are measured on how valuable you are.
The only thing a lender wants to know is whether or not you can be trusted to make money by paying back your credit. Your credit score is a measure of your reliability. To get credit, you have to be able to show lenders you can be trusted. You have to prove you are a valuable commodity. To do this, you’ll have to make sure you avoid some common credit score mistakes.
Mistake 1: Making a Late Payment
You already know this one, but stating the importance of paying your bills on time cannot be repeated enough. As the single largest credit score factor, timely payments can make or break your credit health. Pay your bills on time, every time. Not doing so is never a good idea.
If you ever get to the point where your bills are close to six months past due, you need to act immediately. Once a credit card payment has lapsed for six months or more, you risk having a charge-off levied against you. This is incredibly bad.
A charge off is an accounting term used when a company no longer considers a debt an asset. When you get a charge off, it does not mean you are off the hook for paying the credit card company back. It means the company considers you so untrustworthy that your debt is now considered a liability. This is absolute poison on your credit report, and will linger and damage your credit score for years to come.
Mistake 2: Debt Settlement
Consumers who incur a lot of debt will sometimes look to debt settlement as a way out. While this may be a good idea for some people, it is often a bad choice for many others. When you ask to settle a debt for less than the amount owed, the payment gets recorded on your credit report for all to see. Any time you apply for credit in the future, that settlement will show up on your credit report. It tells lenders that you might not be able to pay your debts back. It tells lenders that you are risky.
Mistake 3: Using too Much Credit
Having credit can be a great convenience, but using that credit irresponsibly can hinder your chances to get more. If you have a credit card with a $15,000 limit, maxing it out and making only the minimum payments each month is a bad idea. Creditors want to see consumers who act reasonably, meaning they only use a small percentage of their available credit at any time. As a good rule of thumb, keep the amount of credit you use at any time to 30 percent or less than your allowed limit.
Mistake 4: Using Too Little Credit
Using too little credit can also hurt your score. If you have a half dozen credit cards but no other form of consumer credit, you are not doing your credit score any favors. If, on the other hand, you have a couple of credit cards, car payments, and a personal loan, you are doing much better. Creditors like to see you can maintain varied forms of consumer credit and can handle them responsibly.
Mistake 5: Closing Credit Card Accounts
Lots of people think that if they pay off their credit card debt and never use their cards again, their credit scores will take off into the stratosphere. Unfortunately, the exact opposite is true. Remember, you are being evaluated on your ability to use credit responsibly. If you close a credit card or just stop using it, that card history disappears from your credit report. Potential creditors have less information to go on when deciding if you are worthy of a loan. Paying off your credit cards is great, but don’t stop using them completely. If you have a few unused credit cards, make a couple of small purchases with them every couple of months or so and pay them off. Keep your accounts active so lenders can see how valuable a commodity you are.