The Top 10 Mistakes When Trying To Improve Your Credit Rating
1. Applying for cards you don’t have a chance at getting
You shouldn’t just apply for cards indiscriminately. Why? Because every application results in a credit inquiry and that will stay on your report for 3 years. Having too many credit inquiries will hurt your score, so only apply for a card if you have a good chance of being approved for it.
2. Carrying a credit card balance and paying interest on it
Some people think it’s better to carry a balance (instead of paying your bill in full). Usually the amount owed on your monthly statement is what gets reported to the credit agencies. So whether you carry the balance forward – or pay it in full – the effect will be the same. The amount due in either scenario will show up on your report. So don’t feel the need to intentionally carry a balance on a credit card, because doing so won’t offer any added benefits.
3. Only using one type of credit
There are 2 types of accounts; installment loans and revolving credit. The latter of which refers to credit cards. Installment loans are any type of loan where you pay a fixed amount each month over a pre-determined amount of time. The credit scoring formula favors those who have both types. If you’re brand new to credit or trying to rebuild, check out these secured cards (almost anyone can qualify for them).
4. Maxing out your credit cards
Most personal finance professionals agree that the ideal debt to credit ratio is 30% or less. What that means is you should try to use less than 30% of your card’s credit limit at any given time. The reason for this is because the scoring formula will frown upon people who max out (or come close to maxing out) their credit cards. Why do they do this? Well if you have a $10,000 limit and are using $9,000 of it, that kind of looks like you’re at the end of your rope, right? (Side note: When it comes to cards with “no preset limit” such as a Visa Signature account, the scoring formula will take the account’s highest monthly balance and use that as the assumed credit limit for this calculation).
5. Paying your accounts late
This one is obvious, but many people fail to take it seriously. They wrongly assume that one or two late payments won’t hurt them. The truth is that late payments will hurt you regardless of whether you have bad or good credit. Those with excellent credit scores will be hit the hardest by a late payment, since they have the furthest to fall. For those with really bad credit, the impact might be minimal, but that’s only because their score is low to begin with. Either way, why let this avoidable mistake impact your credit score?
6. Letting a bill go to collections
Again this is another one that is obvious, but for some reason many feel it’s okay to ignore certain bills, such as those from doctors, hospitals, parking tickets, etc. Regardless of who you owe the money to, don’t ignore it. Because if it ends up on your credit report, it will be hurting your credit score.
7. Not checking your credit reports regularly
Even if you are doing everything right with your accounts, it’s still important to check your credit reports on a regular basis (preferably at least once per year). The reason for this is because mistakes do happen. Someone else with the same name or personal details might accidentally have their account tied to your report. Or one of your accounts that you think is within good-standing might have reported something incorrectly. So make sure you double-check your reports to ensure everything on them is accurate.
8. Cosigning onto someone’s account
As a rule of thumb, it’s generally a bad idea to mingle your credit with someone else. If you cosign onto an account for a friend or family member, it may lead to problems down the road. For example, if you cosign your girlfriend’s credit card application, can you say with 110% confidence that you two will still be together 5 years from now? Because with most accounts, after someone is added, the only way for them to be removed is if they choose to remove themselves (in other words, you might not have the power to do so). Obviously you can see why cosigning is a bad idea. Instead, an individual should focus on building credit under their own name.
9. Closing out your oldest credit accounts
Your score takes into account the average age of your credit accounts – the older, the better. So let’s say all you started out with were a couple mediocre student credit cards from your years in college. Then after graduation, you were able to get approved for some of the best credit card offers on the market. Just because you have something better now, it doesn’t mean you should close out those old student cards. As long as your oldest accounts aren’t costing you anything, keep them open indefinitely.
10. Believing “no credit” is the same as “good credit”
Creditworthiness is something you have to earn! Some people avoid credit cards and loans because they don’t need them. Then later on in life when it comes time to apply for a mortgage, they get flat out denied due to lack of credit history. This is why it’s important to have credit accounts and use them responsibly, even if you don’t need to borrow anything right now.