Your credit score is more important than ever today. Employers, landlords, and college admissions offices will look at them as part of their screening process. Many employers will look at them before hiring a new employee. On top of that, of course, banks will base most of their credit decisions and loan approvals heavily on credit scores. Insurance companies will even use it to figure your auto or home insurance premiums.
Needless to say, maintaining the best credit score possible is of the utmost importance. Unfortunately, it seems there are more credit-score ruining pitfalls out there today than ever before. You need to be aware and avoid them at all costs!
Here’s what you can do to avoid these top 5 mistakes:
1. Carrying high credit card balances.
Much of your credit score is determined by the percentage of your total available credit that you’re utilizing. This is called your credit utilization rate. If your credit limit is $10,000 and you’re carrying a $9,000 balance, then your utilization rate is 90%.
● Having a 0% rate isn’t ideal either. You want to show that you can use credit responsibly over as long a time period as possible. The credit bureaus don’t share their “secret sauce”, but most experts believe that a utilization rate below 30% is ideal.
2. Lack of timeliness.
Never miss a payment! Ever! The largest influence on your credit score is how well you do paying your bills on time. Credit bureaus usually aren’t notified until you’re at least 30 days late. After 30 days, your score will take the hit. The penalty to your score will increase every 30 days after that. Needless to say, if you notice you missed a payment, get it paid ASAP, especially if you’re within the initial 30-day window. At the end of the day they want your money and it’s better late than never.
3. Lack of housekeeping.
The majority of credit reports have errors and these mistakes are rarely tipping the scales in your favor. The minimum effort you should make is to get a free copy of your credit report every year. Look for errors and dispute or correct them.
● If you know you’re going to be applying for a line of credit, it’s a good idea to review your credit report at least 90 days beforehand. A mortgage lender is going to require you to explain any errors in writing before you close.
4. Canceling credit.
Some experts like Dave Ramsey will beg you to cut up all your credit cards. Doing that is fine; just don’t close the accounts. Every account you close will reduce the total credit available to you and increase your utilization rate. You want new potential lenders to see that many other lenders have already given you large lines of credit. This makes you appear to be a more trustworthy risk.
● The ideal situation is to have a large amount of credit available to you, but carry as low a balance as possible.
5. Having a limited variety of credit.
Credit cards are easy to get and a good place to start building a credit score. However, lenders like to see that you could pay off a car loan or to pay a mortgage on time as well.
● You don’t have to keep balances on all of them at once. If you have a paid off car loan or two in your past, that’s perfect. It shows you can come through and finish a loan you started.
Having a high credit score sure makes life a lot easier. It’s much easier to get credit when you need it, and that credit is much cheaper, as well. The interest rates you’ll pay on loans and credit cards are largely reflective of your credit score. Get your score as high as you possibly can, and you’ll save a ton of money over your lifetime.
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