Credit Mistakes You are Making and How to Avoid Them
Establishing good credit habits is an important part of your financial journey. It is not feasible for most people to pay cash for large purchases such as a home or a car. In most cases, to buy these items, you likely need to qualify for a loan or line of credit. Establishing good credit is one of the biggest factors when being considered for approval on any loan or credit line. Avoiding common credit mistakes will help your odds when being considered for loan approval and improve the ways you manage your credit.
Not Reviewing Your Credit Report Frequently
A good rule of thumb is to stay on top of your credit by checking your credit report at least annually. Frequently reviewing your credit report makes you aware of the accounts that need improvement and gives you an opportunity to correct any possible errors.
First, find a reliable source to obtain a credit report, one that is aligned with the three major credit bureaus: Experian, Equifax and Transunion. Annualcreditreport.com is a good resource as it provides a free annual credit report from all three bureaus.
Second, you should review the report for any errors, this includes any late payments, collections, charge offs or other incidents that could affect your credit in error.
Third, evaluate any accounts that are impacting your credit score negatively such as high balance credit card utilization or collections accounts, and prioritize how to remedy those accounts. Prioritizing good credit habits allows you to prepare the best credit score for any future loan applications.
Carrying a Balance on Your Credit Cards
Active credit cards show lenders that you can reliably have a line of credit and maintain it. However, it is a myth that you have to carry a balance on your credit cards to leverage a better credit score. Having a balance on your credit cards increases your credit utilization rate, a ratio that compares current debt to available debt, which could lower your credit score. Credit utilization accounts for 30% of your credit score, and the lower your debt ratio the better.
Carrying a balance also becomes costly due to the interest charges being accrued each month, and on average, rates on revolving credit tend to be higher than the average loan. Actively using but ultimately paying off credit cards will have a tendency to yield better credit and save on those pricey charges and interest. The lower the utilization, the better. A good habit to establish is paying off your monthly balance in full every month. If that’s not an option, make sure to pay more than the minimum payment so that it takes less time to pay off the balance, saving you the extra interest charges.
Missing a Payment or Not Paying Collections
Being late on payments or having frequent missed payments is seen as undesirable by lenders and can really affect your credit score. This also applies to small collections on your credit that you may think are too small to be significant. When lenders are reviewing your credit, whether it be for a new loan, an increase in credit or a request for a lower interest rate, your propensity to pay is taken into account to determine the interest rate or the amount of the loan. Payment history accounts for 35% of your credit score so the best practice is to stay on top of your payments. You can organize on-time payments by setting reminders or utilizing online bill payment services that can process payments for you. Financial institutions, such as SDCCU, have a bill pay service available to their members that can be easily managed online. For more information visit SDCCU’s online banking benefits.
Applying For New Credit Too Often and Closing Old Lines of Credit
A common mistake is opening too many new accounts at once. It is better to be more conservative with the frequency in which you open new accounts. Every new credit line adds an inquiry to your credit score, decreasing the score each time it is run. In general, having only credit lines you can maintain helps your credit score and can prevent you from exceeding your budget. Closing your oldest credit lines can also negatively impact your credit because lenders are looking at the length of your lines of credit to show you can maintain accounts for long periods of time. Analysts reviewing your application for a loan want to see that you can stay on track with your accounts, the older the account the better.
Trying to Repair all Accounts at Once
Focusing on improving your credit will yield many benefits for you in the long run. However, if you are trying to improve too many accounts at once you may end up discouraged and give up before you can make significant progress. Directing your attention to one account at a time will help you stay on track and keep you focused on accomplishing individual wins. As you prioritize the accounts that need work, you can create a roadmap for improving each account. Focus on the accounts that are more costly first. As you improve each account, you will notice the benefits that come with good credit.
Now that you’re aware of some common credit mistakes, it is time to take action. Evaluate where you can make improvements and create a roadmap for improving your credit journey. Good credit habits take time and there is no better time than now to start making changes for a better credit future.
Visit our Financial Knowledge Blog to learn more tips on setting up a solid financial future or join us for Financial Wellness Wednesdays.