If you’re reading this article you know how important your credit score is to your financial security. Your credit score can affect whether you get a particular job, how much you pay for insurance, whether you can get a loan, a mortgage or even an apartment. The biggest thing that your credit score determines is how big of a risk the banks think you are and how much they are going to charge you in interest and fees for access to credit.
Building a good credit score and cultivating habits that will keep your score high are incredibly important, especially in our economy today. Most consumer don’t understand how seemingly small events can dramatically alter your credit score and then are left working for years to rebuild their credit. Understanding the most common mistakes you can make, and how to avoid them, will be critical for keeping your credit score happy and ultimately saving you money.
1. Never Max Out A Credit Card (AND CERTAINLY NOT MORE THAN ONE!)
Let’s get the obvious point out of the way now, because you already know that putting thousands of dollars on your credit card until you hit your max is bad because it’s a lot of spending all at once. If you can’t afford to pay the bill at the end of the month then you’ll start accruing interest and that’s bad. What you may not know is that credit rating agencies care about how much credit you are using at any one time as much as they care about whether you pay your bills off in full each month. Statistically they know that people who have a high credit card utilization rate, your total balances across all your cards divided by the total credit you have available across all your cards, is a good indicator of whether somebody is at risk of becoming over leveraged and will miss payments in the future.
So how much credit should you use to look like a responsible credit card holder? Well, the answer is kind of tricky but there is a rule of thumb that you want to use between 1% and 25% of your total credit available across all your cards. You don’t want to have a $0 balance on all your cards, but you also don’t want to spend too much to raise their red flags. By using, for example, 15% of your total credit available you’re showing the credit rating agencies that you use credit but don’t rely on it. You can keep your utilization low simply by not making unneeded purchases or by paying for some things in cash. You can also ask your credit card company to raise you credit limit, but make sure to find out if this will result in a hard credit inquiry before you ask because hard inquiries will drop your credit score in the short term.
2. Don’t Apply For Too Much Credit
As I mentioned above, be careful about how many hard credit inquiries you rack up because each one will drop your credit score by a few points. Each time you have a hard inquiry on your credit report it is an indication that you are asking for more credit. If you have a lot of hard inquiries in a short period of time then it looks like you’re desperate for credit and could be a higher credit risk. Having 2-3 hard credit inquiries each year is reasonable, but be careful if you go over that amount. If you are making a number of larger purchases that require credit checks, such as moving to a new area and buying a home and a car at the same time, try to consolidate as many of these purchases into one short period as you can. Some credit ratings models will understand that because of the number of credit inquiries on your report from the same geographic are that you are probably in the middle of a move and may be shopping for good rates and it won’t ding your credit score as much.
3. Don’t Pay Your Credit Card Balance In Full and On Time Every Month
A sure way to destroy your credit is to not pay your bills on time. One of the biggest factors used to determine your credit score is the percentage of the time you make your payments on or before they are due. Lenders and credit card companies need to know that you are reliable and that you’ll pay your bills on time. Missing just one or two on time payments can drop your credit score by tens of points from excellent to good, or from good to fair. You can’t get by paying your bills mostly on time, you need to pay them on time every time to keep your score high. You should also strive to pay your full balance each month. Carrying a balance on a credit card is a very expensive way to pay for things so that’s your top reason to pay your full balance each month. The second reason is that when you carry a balance from month to month it shows credit card companies and lenders that you have a habit of spending more than you can afford to, which will negatively impact your credit. The easy way to take care of this common problem is to simply spend only what you can afford to pay off that month on your credit cards and to enroll in auto-pay or make sure to send in your payment on time.
4. Don’t Monitor Your Credit Regularly
Monitoring your credit wasn’t really something you had to do 10 years ago, but now it’s incredibly important that you keep track of your credit. Cybercrimes are rampant and it seems like every week the news reports another major data theft at one of the largest banks and retailers. You may even know a friend or family member that has had to deal with the headache of having their identity stolen. Staying on top of your credit report can help you spot problems before they blow up on you and ruin your score. The Federal Trade Commission reports that roughly 1 in 5 people have an error on their credit report that can negatively affect your score. You can get your credit report from each of the three big credit ratings agencies for free once a year just by going to www.annualcreditreport.com and placing a request. Be wary of using other sites that enroll you in credit monitoring services as these generally are not effective and cost you money. Don’t just check your credit report, look at your credit card statements each month and make sure that you recognize all the transactions you see. If you spot something that looks fishy call your credit card company right away. Most credit cards will not hold you liable for purchases made when your card is stolen so long as you report it quickly.