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If you have good credit, you can find your way to a house, a car, or anything else you want much more accessible. In addition, that credit score may help potential lenders understand more about your credit history, which will be crucial for any financial institution that considers lending money.
If you have terrible credit, it can be tough to get any credit. That’s why it’s so important to understand the importance of when you can use credit or not and even how you should be using it. Let’s take a closer look at some of the worst mistakes you could be making.
1. Maxing Out Your Cards
One of the biggest things that impact your credit score is your credit utilization ratio.
If you’re currently sitting on a 50% debt-to-credit ratio (or more), you will have a wrong time with your credit score overall.
Credit lenders don’t want to give you new credit if you have maxed-out cards or are close to maxed out. Instead, it would be best if you were somewhere around 10% – 30% credit utilization instead.
2. Paying Late
If you make your payments late, you will lower your credit score.
When you have any credit, it will get reported to a reporting bureau. Even landlords can make reports, and storage unit owners.
All of these things could end up as late payments on your credit report, and that can cause you to get a hit on your credit score.
3. Keeping too Many Cards
You want a credit card that can help you increase your score, but if you keep getting too many cards, it starts to decrease your score.
It’s super easy to get an offer for a credit card, whether in the mail or when you’re shopping at a store.
You may even get special offers to save extra money if you sign up. But there are some times when this is not going to be a benefit. It’s essential to look at the long-term effects of those credit card offers.
If you could make some great bonuses and pay-off cards, you’ll want to be careful about it even still.
For those who get too many credit cards, especially those who do so within a short period, you’ll get more hard inquiries and have lower credit age. All of that is going to drop your score.
4. Co-Signing a Loan
If you co-sign for a loan for someone else, you are saying that you take responsibility for the loan in case they don’t pay it. Not only that, but it will be on your credit report, no matter what. If the payments are late or missed, you also get a hit on your credit score.
That’s going to make for some problems with your score. Think about the result if that person doesn’t take action.
5. Getting a Card You're Not Ready For
Many people get credit cards right at 18 or earlier than that with a co-signer, but that's not always the right way to go.
Applying for a credit card should never happen before you know finance basics. You should know how to control your checking account. You should know about deadlines, and you should be able to manage some money. On top of that, you should have a steady income to make the payments.
You don't want to miss any payments because that's going to cause damage to your score. It's all about knowing what your financial basics are.
6. Closing Out Accounts
If you're good at managing debt, you will have older credit accounts that look good on your report. Closing older accounts means you will have a lower average, making lenders think you don't understand what you're doing with credit. Not only that, but you could have some damage to your credit utilization rate if you close an older account.
Think about this: if you have two credit cards of $10,000 and $6,000 in debt, you have a 30% credit utilization ($6,000 out of $20,000 available credit). But if you close one of those cards, you now have a 60% credit utilization.
Credit cards that you might have problems with, regarding missed payments or even collections, could damage your credit report for seven years. That's not something you want, especially after you've canceled a credit card.
7. Ignoring Your Credit Report
If you're not paying attention to your credit report, you could easily have errors you don't know about. It would be best if you took a closer look at Experian, Equifax, and TransUnion to ensure that you don't have mistakes.
You'll be able to fix those mistakes quickly if you see them.
The biggest problem for these will generally be medical payments, which may take a lot longer than other things to show up in your report.
8. Asking For A Credit Limit Increase
If you can keep your utilization low, you will have a better credit rating.
In case you don't have low utilization, however, you might think that requesting an increase would be the best thing, but that's not always the case.
If you request an increase, your financial institution will look at your information again to decide if you should get that increase. As far as your credit report is concerned, it's going to look like you've applied for a brand-new credit type.
9. Paying the Minimum
If you're making payments on your bills, that's great, but paying the minimum will mean you're not paying off your bill.
A $10,000 balance and an interest rate of 13% means that your $200 minimum payment will take you over six years to pay off that debt. Plus, you're going to pay nearly half that again in interest.
That means you're not going to get very far with paying only the minimum and will not lower the balance or fix your utilization ratio.
10. Ignoring Your Personal Information
Identity theft is a real concern, and if you're not careful about your accounts or anything you open, you will need to keep track of your personal information.
Your banking account, credit card numbers, and your social security number are crucial, and you need to keep them safe. You also need to make sure that they're constantly updated when it comes to your credit report.
11. Avoiding All Credit
There can be all kinds of problems when it comes to credit, but you want to make sure you have good credit rather than no credit.
Your credit helps you build up a good history, and it keeps you from going into debt.
Getting other things you need, like rent for an apartment or even having utilities and borrowing, will be complicated if you don't have the financial history you need.
Bottom Line
You need good credit, so look at these potential mistakes and don't let them get you down.
Your best option is to make sure that you make your payments on time and keep your balances down. If you have already made a couple of mistakes – don't despair.
Usually, you can repair your bad credit in a couple of months by avoiding future mistakes.
