Most people are aware of the big things that can cause your credit score to plummet: filing bankruptcy, sending an account to collection, or being repossessed. However, these are not the only actions that can lower your credit score. These are some other mistakes that a consumer can make with their credit. While not the ‘major offenders’, these 5 mistakes can still prohibit you from joining the credit elite.
Max out your credit card.
Your balance-to-limit ratio is almost as important as paying your bills on time, accounting for 30% of your credit score. A good rule of thumb is to never charge more than 30% of your credit limit. This means that if you have a total limit of $10,000 on your credit cards, you should never have a balance greater than $3,000.
Consumers who think they are managing their finances wisely by having only one credit card, but are using more than 30% of the limit, are actually HURTING their credit score.
missing a payment
Just one 30-day late payment can significantly lower your credit score. Payment history is the single most important factor in calculating your credit score, at 35%.
A consumer who has no late payments on their credit history is earning a lot of points for their positive use! One late payment can change all that. A good credit score can drop 80 points with just 30 days late.
Whether you sign up for automatic payments through your bank, get an app to remind you, or write your bill due dates on your calendar, pay those bills on time!
They don’t check your credit report.
It is estimated that more than a third of credit reports contain some type of error. These bits of misinformation could be accounts showing up late that weren’t really late, charges that should never have gone into collections, or accounts that aren’t even yours!
By not checking your credit report, these errors linger on your credit history and can cause your score to plummet. Be sure to check your credit report at least once a year. Review all accounts, balances and payment history. Be sure to follow up on any information that appears to be inaccurate and remove it from your report by filing a dispute.
Co-sign a loan.
Sure, you want to be a good friend, neighbor, cousin, brother, etc. and help obtain a line of credit that your loved one may not qualify for on their own. However, becoming a co-signer on a loan for someone else is really a problem. If the borrower does not pay on time or at all, you are responsible for the loan.
The loan will also appear on your credit report and count toward your credit score. If the borrower is paying late, all those missed payments will show up on their credit report, which will affect their credit score very negatively. And once that happens, there’s nothing you can do about it.
The scariest part of all is that this can happen without your knowledge. Cosigners rarely receive a copy of the invoice, so they won’t be made aware of the issue until the account is in a default state.
The best advice on this is: Just say NO!
Closing an old credit card
15% of a person’s credit score is the length of their credit history. Credit cards are considered based on the age of the oldest account and the average age of all accounts.
Look at this example. Let’s say you have 4 credit cards. The oldest is one you opened in college, 22 years ago. You have had the others for 15 years, 9 years, and one you just opened 2 years ago. Currently, the oldest account is 22 years old and the average age of the accounts is 12 years old. If you close the oldest account, that changes the oldest account to 15 years, and the average age of the accounts decreases to 8 years. This change in credit history can cause a decrease in your credit score.
The best idea would be to keep the old credit card and use it a few times a year to make sure it counts positively towards your credit score.
It is obvious to protect yourself against bankruptcy, foreclosures and collections. Also make it a top priority to take steps to make sure you don’t make any of these little credit mistakes. Your credit score will thank you!