Common Credit Mistakes (and How to Avoid Them)

Common Credit Mistakes
Your credit score can determine whether or not you get approved for a credit card, mortgage or auto loan. It can also be used to determine whether or not you can rent an apartment or even get a job. The importance of your credit score doesn’t stop there though; it also can impact how much you’ll pay on utility deposits, more importantly, interest rates.   

There are different scoring systems, but for all scores, higher equals better. With a higher score, you may be more easily approved for credit and will get the best interest rates available. 

So how do you know how to keep a good credit score? Consider avoiding these common credit mistakes: 
  • Carrying large balances: Keeping your balances as low as possible increases your credit utilization ratio, the percentage of your credit limit that you use. The amount you currently owe on accounts can make up to 30 percent of your credit score.  
  • Closing credit cards: You might think closing credit cards you don’t use anymore is the responsible thing to, but your score can actually be hurt by closing accounts. This is because when you close an account, you lower the amount of credit available to you. Remember your credit utilization ratio from above? It is ideal to have credit available to you, but not be using too much of it. 
  • Making late payments: About 35 percent of your score is related to your payment history. Late payments on credit cards, loans or other bills could lower your score if those late payments are reported to the credit bureaus. 
  • Defaulting: Failing to pay back the amount you owe on a loan or credit card can seriously impact your score. Bankruptcies and foreclosures are considered the most serious.  
  • Opening too many new lines of credit: Each time you apply for a credit card or loan, an inquiry into your credit history is made. This may negatively impact your credit score.  Opening multiple credit cards or loans is a red flag; it may signal that you are in financial distress and/or at risk of becoming overextended.  Having multiple new accounts can also negatively impact your credit score. 
  • Not having a credit card: You may think paying all cash all the time is the best thing to improve your credit, but if you have no credit cards, then you have no credit history. You are considered “un-scoreable” because there isn’t enough information to calculate a score. With no score, you may appear risky to lenders. If you have an auto loan but no credit card, you may still benefit from a credit card, as that could help diversify your credit file. The mix of your credit history accounts for 10% of your score. 
Avoiding as many of these mistakes as possible and maintaining responsible spending and saving habits can help set you on the path to achieving your financial goals.