Everyone knows the value of good credit but sadly not everyone understands what makes up their credit score. And by not fully understanding the different factors that make up a credit rating or credit score, many consumers fall into bad habits or make mistakes due to lack of information or knowledge.
Knowing what causes bad credit and avoiding the 10 most common mistakes about your credit will ensure that your credit score remains strong.
Timing Can Be Everything
Understanding that a part of your credit score is based on the average length of time that you have had open accounts can be very important. This number is called your average account age and this number accounts for about 15% of your credit score. So don’t make the mistake of opening too many credit cards in a short period of time and inadvertently lowering your average account age. Another mistake that involves timing revolves around major purchases. If you are planning to finance a home, car or make another large purchase such as a debt consolidation loan, then don’t open new credit accounts prior to the major purchase. Those multiple new accounts shorten the average account time and can change your debt to income ratio. These will result in a lower credit score and a higher interest rate on your major purchase.Knowing Other Factors that Influence Your Credit Score
Knowing Other Factors that Influence Your Credit Score
Some consumers believe that having no debt means that they will have a good credit score. That is untrue and is a huge mistake. You need to have an account history, show that you have managed your available credit wisely and have a good history of regular payments to establish your credit score. Some consumers also damage their credit score by closing unused credit accounts. This changes the ratio of credit being used to credit available and actually increases the impact of your current debt. Another major factor in figuring your credit score is balance that you are carrying on your cards. 30% of your credit score is determined by the percentage of your available credit that you have in use. So keeping that balance low is vital.
Some consumers believe that having no debt means that they will have a good credit score. That is untrue and is a huge mistake. You need to have an account history, show that you have managed your available credit wisely and have a good history of regular payments to establish your credit score. Some consumers also damage their credit score by closing unused credit accounts. This changes the ratio of credit being used to credit available and actually increases the impact of your current debt. Another major factor in figuring your credit score is balance that you are carrying on your cards. 30% of your credit score is determined by the percentage of your available credit that you have in use. So keeping that balance low is vital.
Living on Credit Equals Mismanagement of Your Money
There are many great reasons to have a credit card. It provides an easy way to purchase larger items and pay over time, it helps you to establish your credit history, and it is safer than carrying large sums of cash.
But sometimes consumers begin to use a credit card for all of their expenses and begin to live beyond their realistic means. Getting a cash advance normally means paying a fee to get the money as well as interest until the balance is paid off. If you don’t have the cash on hand then you don’t really have the means to pay off the cash advance and you should reconsider the purchase. Another big mistake is to use a credit card as a safety net. Everyone should have an emergency fund to fall back on in the event of an unexpected expense popping up.
Using a credit card should be a last resort and not a replacement for savings and emergency money. And along the lines of over extending and not having a saving to fall back on, many consumers will feel that making only a minimum payment on their credit card is perfectly acceptable. The fact is that most of your minimum payment will likely only cover the interest being accrued. You will carry your debt for many years and pay a huge amount in interest fees if you only make minimum payments.
Make Smart Choices about Your Money
Some of the biggest mistakes that consumers make where their credit is concerned all go back to simply making bad choices. The first case might even seem like a good option to help a friend or family member but it can have a very negative impact on your credit score. Offering to cosign a loan for another person is basically like saying that you will assume responsibility for paying the loan if your friend or family member cannot or does not make the payments.
So unless you have the funds to make the payment, you are risking your credit worthiness on someone else’s ability to pay their debt. In addition, for the life of the loan, it shows up on your credit report as a debt that you owe. And if they don’t repay the debt, then that default is now a part of your credit history because you assumed responsibility too. Cosigning a loan might seem like a good way to help out a friend but be sure to consider all of the ways that co-signing can hurt your credit before you make that commitment.
Another example of a poor decision is simply not paying your bills on time. Maybe you didn’t want to take the time to make the payment or you were short on funds and figured that you would just pay the bill a few days late, but it still hurts your credit score. Payment history determines 35% of your credit score and the longer you wait to make the payment the worse the damage is to your credit score. Make a smart choice and create a budget and pay your bills on time.
Monitor Your Hard Work
You are entitled to one free credit report from each of the three credit reporting agencies each year. Take the time to request the reports and read them to be certain that they are correct. This will also let you review any new accounts that were opened in your name to protect yourself from fraud or identity theft.
Any discrepancies that you find should be reported to the credit bureau. In addition to annual monitoring, check all of your bank statements and credit card statements for unusual purchases or mistakes. It is your responsibility to make sure that all of the information that is used to determine your credit score is correct.
It doesn’t happen often but a simple mistake could impact your credit score for many years. Don’t let simple mistakes, clerical errors or error in judgement lower your credit score. Invest a little time in learning what causes bad credit and avoid these most common mistakes.
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