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Credit scores are an important financial tool that can help you secure loans and low-interest rates. However, building good credit can be confusing given the number of factors that can influence it. Unfortunately, there’s no one way of calculating your credit score which makes it even harder to build or improve.  In fact, there are many myths and misinformation surrounding credit scores which can lead people into making mistakes when trying to build their credit. 

Top Mistakes When Trying To Improve Your Credit Rating

If you’re trying to improve your credit score, check out these top 10 mistakes to avoid. 

1. Believing “No Credit” Is The Same As “Good Credit”

Some people avoid credit cards and loans because they don’t need them. But then later on in life when it comes time to apply for a mortgage, they get denied due to a 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.

Moreover, credit can be a powerful tool for more than just loans. Here are a few other reasons your credit can help:

  • To get a rental – Many landlords will check your credit scores before agreeing to lease to you. If you have poor credit or no credit, they may be warier of leasing to you. 
  • To get a job – Some employers may check your credit as part of their screening process. This may be done for security purposes as it can help them verify your identity. Moreover, it can give employers perspective on how responsible you are. 
  • To get a cell phone – Most cell phone providers will perform a credit check before offering their services. If you have bad credit, you may be illegible for certain plans or phones. 
  • To get a low premium – Many insurance companies will check your credit when determining your premiums. 

2. Carrying A Credit Card Balance And Paying Interest On It

While paying the minimum balance on your credit cards will help you avoid any late or missed payments on your credit reports, it can still harm your credit. When you carry your credit card balance from month to month, you’ll not only accrue more interest but you’ll be more likely to have a higher debt-to-credit ratio. A high debt-to-credit ratio can negatively affect your credit, so it’s best to try and pay your bills in full each billing cycle. In general, it’s recommended to keep your ratio at 30% or under. 

3. Applying For Credit Products Without Checking The Eligibility Requirements 

You shouldn’t just apply for credit cards and loans indiscriminately. Why? Because every application results in a hard credit inquiry and that will stay on your report for 2-3 years. Having too many hard credit inquiries can hurt your scores, so only apply for a credit card or loan if you meet the minimum requirements at least. 

4. 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 every 6 months to once a year). Unfortunately, lenders and creditors can make mistakes when reporting your credit information to the credit bureaus, which can negatively affect your credit.  

Types Of Errors To Look For

  • Look for mistakes regarding your basic personal information, such as your name, birthdate, and address.
  • Ensure that any negative information on your credit report that is past the maximum number of years it can stay on a credit report is removed. 
  • Check for errors regarding your credit accounts such as misreported payments.
  • In some cases, someone else with the same name or personal details as you might accidentally have their account tied to your report. 
  • Check for any unidentifiable credit accounts or inquiries. This could be an early sign of identity theft. 

How To Dispute An Error On Your Credit Report?

How To Dispute An Error With TransUnionLearn More
How To Dispute An Error With EquifaxLearn More

5. Maxing Out Your Credit Cards

Most personal finance professionals agree that the ideal credit utilization 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 that most credit score scoring models (there are many, which is why you have more than one credit score) take into account how high your credit card balances are compared to your available limits. 

Do you use your credit card for all your purchases to accumulate points?

Rewards credit cards are a great way to earn cash back, points, and other perks. Using your rewards credit card to cover all your monthly expenses is a great way to maximize its benefits. But, if you’re continually maxing out your card(s) every month, you could be hurting your credit scores. To mitigate this issue, pay off your credit card(s) twice a month. 

6. Cosigning A Loan

While cosigning a loan for a friend or family member can be extremely helpful for them, it can also lead to credit problems for you in the future. When you co-sign a loan or mortgage for someone, it means you’ll take responsibility for the loan in the event that person defaults on their payments. If you’re unable to make the payments in their stead, the missed payments will show up on both your credit reports, which can negatively affect your credit scores. 

Moreover, removing yourself as a cosigner is extremely difficult to do. In general, the borrower will need to reapply for the loan to release you as the cosigner. 

7. Forgetting To Pay Your Bills

Many people assume that a few late or missed payments won’t hurt their credit scores, but even one missed payment could have a negative effect on their credit. Payment history accounts for around 35% of a credit score, so it’s best to pay your bills on time. At the very least, you should at least make the minimum payment. If you’ve missed a payment, try to rectify it within 30 days of your billing due date as most lenders will only report late or missed payments after 30 days. 

To avoid missing a payment you can try the following strategies: 

  • Set up automatic bill payments You can set up automatic payments from your chequing account to pay your credit card bills. 
  • Consolidate your debts – If you have multiple high-interest debts, consider consolidating them to make it more manageable and easy to track. 
  • Align your bill due dates – If you have multiple bills with different due dates, you can ask your lender or creditor to change the billing date so that they align. 

Watch Out For Collections

If you forget to pay a bill for long enough (generally between 90 – 180 days), your lender may sell your debt to a collection agency. When that happens your account will receive an R9 credit rating, which is the lowest rating you can get. This can severely negatively affect your credit scores. 

8. Closing Your Old Credit Accounts

The average age of your credit accounts is usually used to calculate your credit scores. The older the average age of your account, the more it may positively affect your credit scores. As such, closing old accounts can negatively affect your scores as it reduces the average age of your accounts. 

As long as your oldest accounts aren’t costing you anything, keep them open and active indefinitely.

Top Credit Improvement Mistakes FAQs

Which credit mistake can seriously harm my credit? 

Mistakes surrounding your payment history can usually impact your credit more severely. Your payment history accounts for around 35% of your credit scores depending on the credit scoring model, so mistakes such as missed payments can severely impact your credit scores. 

What are some common mistakes that affect credit? 

Missing payments, opening and closing credit accounts, and only making minimum payments on your credit card are some common mistakes that can negatively affect credit. 

What factors are used to calculate a credit score?

Payment history, debt-to-credit ratio, credit history, credit inquiry and public records are five common factors used when calculating a credit score. 

Bottom Line

Whether you’re trying to build or improve your credit, it’s important to understand how your credit score is calculated. This can help you take appropriate action when trying to build your credit. Moreover, it can help you avoid making common credit mistakes that can damper your credit improvement journey.

Caitlin Wood, BA avatar on Loans Canada
Caitlin Wood, BA

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

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