5 Ways You Could Be Hurting Your Credit Score (and Some Quick Fixes)
Having a good credit score is important for financial success in today’s world, whether you’re applying for a home equity, a car lease or need a loan for your business. It’s so important that some high schools include a lesson or two in their curriculum. And it’s no surprise, a good credit score can get you favorable rates on your mortgage, personal loan or business line of credit, a bad score can make it impossible to get the credit you need.
1. Making loan or credit payments late
While this may seem like an obvious thing, you’d be surprised how many people have made this mistake, just missing one payment can result in a huge drop in your score that will take months of good behavior to recover from. Thankfully this is an easy fix, try to stick to one credit card, making it easier to remember to pay. If you use multiple credit cards, select one day a month to pay all your bills in one go, or setup a recurring event reminder to help you remember what’s due when.
2. Maxing out your cards
A large portion of what makes up your credit score is the ratio of debt to available credit. The higher your ratio, the lower you’ll find your credit score so it’s important to try to keep your ratio below 30%. If you use one card for everything don’t wait for the bill to come in to pay, consider paying the balance down multiple times a month so that your credit card will be reporting a lower utilization ratio. Another option is to call your credit card company and ask for an increase in your limit, this will instantly lower your ratio as you now have more available credit.
3. Opening one too many cards (or closing them)
Every time your credit is run a lender has to make a “hard inquiry” to check your credit and decide whether to approve you or not. Opening a few credit cards in a short period of time will result in a small drop in your credit score, but it’s also a red flag to lenders as you may be in some financial trouble. So apply wisely. It seems a bit counter intuitive but closing an account will result in a small hit to your credit score, when you close an account you actually increase your ratio of debt to credit resulting in a drop to your credit score. Realistically there’s no reason to close a credit card unless it carries a high annual fee, most credit cards will automatically close out your account (with no detrimental effect to your credit score) after a period of inactivity, typically 2 years. If you find you have no choice but to close an account start with the newest ones, closing your longest held credit card will mean a bigger hit to your credit score, older accounts help to validate your fiscal responsibility over a long period of time.
4. Bouncing a check or two
Just like missing a payment, bouncing a check will be a ding against your credit score. Bounce one too many and your bank will be sure to let all three agencies know. If this only happens once in the blue, then just be sure to check your bank balance before writing out a check, if you find this happening more often then consider opening a second account just to use for funding any checks written, you’ll be able to easily transfer money into the account to cover any checks and as an added bonus, no bounced check fees.
5. Never checking your credit report
Checking your credit report is important for a number of reasons, but the biggest one is to ensure that the information on there is accurate. You’ll want to check that every open account is one you opened, that the balances reflected are accurate and take a look at any notes or alerts. Every year you are entitled to receive a free copy of your credit report from each credit agency by going to annualcreditreport.com. This is an important step as a 2013 FTC report found that 5% of consumer had one or more errors on their report that could affect their credit scores. A few minutes of your time looking over your report can you save you hundreds or thousands of dollars in interest charges.