Avoid These 5 Mistakes That Can Damage Your Credit Score

KEY TAKEAWAYS

✔  Simple money decisions can have a large impact on your credit score. Know what they are and how to avoid them. 

✔  Credit bureaus look at your whole picture so it pays to establish lots of good habits.

✔  Credit is good when you use it wisely and you don’t use more than you need.

You’ve likely heard a story about someone who posts a video of a simple life hack, like how to hang pictures faster or how to make the perfect scrambled eggs and it suddenly goes viral. One person likes it, then  they share it, and more people share it until it’s spreading out like a ripple in a pond, in all directions, creating reactions no one could have anticipated.  

When it comes to your money and your credit score, the same thing can happen when a simple decision, good or bad, sets off a ripple effect across your finances. 

To maintain a good credit rating and to prevent damaging your credit score, here are five simple things you should avoid:

1. Paying the monthly minimum

Credit card companies allow you to make a “minimum payment” each month. This is convenient but not in your best interest if your goal is to become debt free and establish a strong credit score. 

Making the minimum payment while you continue to use your credit card will result in always having a high outstanding balance. And that is one of the things credit bureaus look at when they assign your credit score. 

So set yourself two goals: 

• Always pay more than the minimum payment.
• Every month, pay off more than you put back on your card.

2. Making late payments

Life gets busy and sometimes you forget to make payments on time, or you pay a bill a little late because of an unexpected expense. It seems harmless and you don’t see significant consequences right away. However, all late payments are noted – even if only by a day.

Whenever possible, set up automated payments to pay recurring bills on time. When that’s not an option, use whatever kind of calendar you prefer and book a 15-minute appointment with yourself to pay bills. Every on-time payment brings you closer to a better credit score and access to lower interest rates, so it’s worth your time to avoid late payments.  

3. Having too many credit cards

Sometimes pre-approved credit cards just show up in the mail like magic (and always at a time when you’re strapped for cash!). Some come with bonus gifts just for accepting them.   

But it’s not magic. And taking on the added (and unnecessary) responsibility of multiple cards only makes it harder for you to pay more than the monthly minimum for each one on time. Because it’s not the number of cards that lowers your score, it’s how well you manage multiple cards that matters most. Before you know it, your credit score range can dip from average to poor. 

4. Having and using too much of your available credit

Your credit utilization rate (CUR), is the percentage you owe in revolving credit (credit cards, lines of credit) vs. total available credit and is one factor in determining your credit score. To determine your CUR, divide your balance by your credit limit and then multiply by 100. A card with a $1,000 limit and a $300 balance results in a 30% credit card utilization ratio. Experts say about 30% or lower is ideal.

5. Applying for credit too often

Most experts agree two credit cards should be the maximum because more credit cards mean more temptation. Also, applying for several credit cards in a short period hurts your score because each application counts as a “hard inquiry” from a lender checking your credit. This in unlike easyfinancial which does a 'soft inquiry' when you apply for a loan. Your score loses points for multiple hard inquiries because lenders tend to see that as a sign you’re short on cash or you’re planning to take on a lot of debt.

Keeping an extra, unused credit card in case of an emergency might seem like a good idea, but a much better idea would be to start a savings account and add to it regularly.

Actions that seem small can have big effects down the road. If you avoid these mistakes, you are well on your way to improving your credit score! For more great ideas, check out “Build a Good Credit Score with these 5 Habits”.