Bad Credit Score Mistakes Anyone Can Avoid
Bad credit is something that many Americans are dealing with at this time. Fox Business reported in 2016 that more than one-third of the people in America had a credit score lower than 601, which is the line between good and bad credit. Lexington Law reported in 2020 that at least 12 percent of the US population had a credit score lower than 550. Bad credit affects other parts of the world, as well. The UK had more than 8 billion people with credit issues in 2018.
20 Credit Score Mistakes that People Make
Bad credit has a lot of credit score factors. Some of them are difficult to recover from, and some of them can be remedied with a few quick tips. We'd like to share with you some common credit score mistakes people make that cause their scores to plunge into the "bad credit" range. You can use the information to improve your score if you put some thought and effort into it.
These are 20 common credit score mistakes and some details on how to improve them if you're making them.
1. Not Using Credit Cards
One common error that debtors make early in their lives as debtors is not using their credit cards. It's a wonderful thing to obtain approval for a credit card. However, a debtor must use the card if he or she wants a credit report or history. We recommend making at least one small purchase on your new credit card and paying the money back in small increments. That allows the creditors to gauge your creditworthiness and report it to the three major credit bureaus. Every timely payment you make causes them to feel more comfortable doing business with you.
2. Late Payments
Late payments are one of the seven deadly sins of credit. Just one late or missed payment can take your credit score down more than 10 points. In some cases, it can take your score down 50 points or more. Another bad thing about a late payment credit score is that it will stay on your credit report even after you've paid off a debt. It's tough to recover from a late or missed payment. Therefore, you should always try to ensure that you initiate your payment at least a week before it's due. That way, it will post long before the due date and keep your credit report in excellent standing.
3. Not Paying Enough
The amount that you pay each month is another one of those score factors that many people miss. A lot of debtors are happy with just paying the minimum amount each month because it's easy to do. Unfortunately, minimum payments don't quite cut it when you're trying to keep a favorable credit profile. A good portion of a minimum payment will go to the interest and not the principal.
You may make an $80 payment, for example, but maybe only $30 will go toward your credit balance. This "nickel and dime" tactic stretches out the time you will have to pay down your credit card before you get back to a good place. Additionally, the lender will be cautious about giving you a credit line increase when you ask because they'll see that you're only making a minimal effort to repay the funds.
A good "rule of thumb" tactic is to double up on your monthly payments. Pay twice the minimum amount if you can afford to do that. Doubling up will ensure that you pay a chunk of the principal plus any interest the company may have charged you for that month.
4. Making Too Many Inquiries
Inquiries are credit score mistakes that creep up on debtors without their knowledge. Any time you ask a lender to extend you credit, that lender performs an inquiry. An inquiry is nothing more than a credit report pull. There are two types of credit report pulls: hard and soft. A soft pull does not affect your credit score.
A hard pull affects your credit in two ways. First, your score immediately declines when a creditor conducts a hard pull. It may decrease 1-10 points right away. Secondly, hard credit pulls become a part of your overall credit report, and they remain on your record for two years. Lenders will be nervous about you if you have more than two inquiries on your report in a two-year period. They're likely to avoid you altogether if you have more than four.
5. Using Too Much Available Credit
Another one of the major credit score mistakes is using too much of your available credit. Using up all of your credit gives the appearance of financial desperation. Creditors will believe that you are living off of your credit if you use it that quickly and abundantly. However, they do still want to see that you use your credit. Furthermore, your utilization percentage accounts for some of your credit score. It accounts for about 35 percent of your overall score. Therefore, you must find a happy medium.
If you want to stay positive in the eyes of your lenders, you should keep your utilization under 30 percent. That means you should charge no more than $90 on a card with a $300 limit at any time. That will leave you with plenty of credit to use in an emergency, and it will also show the lender that you can use the card and repay your balances responsibly.
6. Repeatedly Applying for Credit
Multiple credit applications can be a detriment to your credit score. Lenders understand that you might make numerous applications if you're shopping for a car or a home. However, they will see a red flag if they notice that you're applying for multiple credit cards or installment loans at one time. Your credit score can drop drastically from that behavior, as well.
The best way to avoid making too many applications is to pull your credit report and find out what your score is before you shop. Contact the lenders personally and ask them what their qualifying criteria are for approval. Most lenders will give you some information about what they require. You can then decide not to apply if you think you won't gain approval.
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7. Having Too Many Open Accounts
Another one of the common credit score mistakes is having way too many open accounts. It's good to have more than one credit account. Lenders like to see that you can handle multiple accounts. However, there is such a thing as having too many open accounts. Five is a good number to have if you're trying to establish yourself. Anything more than five accounts is excessive. The limit is 20 to 22 accounts. Your credit score will start to plummet once you reach that threshold, and potential lenders may begin to look at you as a possible liability.
8. Opening New Accounts
You have to be careful not to make one of the most common credit score mistakes and open too many new accounts in the same time frame. New accounts take your average account age down. The age of accounts plays a role in your credit score. You want to have an average account age of more than seven years to reflect a positive credit history.
Therefore, you may want to hold off on applying for a new line of credit if you've recently opened one. Wait at least two years so that you can establish a strong history with the one you just got. Succeeding in the credit world is all about strategy. You have to think about every move you make and how it will affect you in the long run.
9. Not Having a Good Credit Mix
Another one of the most common credit score mistakes is the lack of a good credit type mix. The credit mix makes up about 10 percent of your overall score, so you'll want to have a good mix on your record. That means you should have at least one source of revolving credit, such as a credit card. You should also have something that you have to pay back in installments, like a personal loan. It's wise also to have at least one auto loan or mortgage. If you can get both, then you will be golden.
10. Bad Debt-To-Income Ratio
Your debt-to-income ratio is a significant number that will affect the way lenders handle your applications. It's a number that looks at how much you earn each year versus the amount of debt you owe. It's especially important when you're applying for something like a mortgage. A common one of the credit score mistakes that people make is applying for credit before they consider their debt-to-income ratio.
11. Closing Accounts
Avoid credit score mistakes like randomly closing accounts. You should keep them open even if you pay them off. Active credit accounts will stay on your credit report and reflect your positive history. If you close the accounts, then you run the risk of lowering your average account age. Your score could drop drastically if you do that.
12. Going Over the Limit
Some actions that you take can do almost as much damage to your credit score as making a late payment can do. One such action is going over your credit limit. Creditors want to see responsible behavior. Going over the credit limit gives the appearance of impulsiveness, irresponsibility, or poor money management.
You don't want any of your creditors to view you that way. It's best to save up the cash to buy things that you want instead of going over your credit line. Alternatively, you should continue to make timely payments. The creditor may reward you with a credit line increase after a certain amount of time.
13. Lack of a Real Estate Account
As stated before, potential lenders like to see all types of credit on a debtor's report. A real estate account is one of the most valued types of accounts you can have. Therefore, you should try to get a mortgage on a home if you can do that. You can get an FHA loan with a credit score of 580. You'll have to make sure that your debt-to-income ratio is low, and you have a down payment of at least 3.5 percent if you want to purchase the home.
14. Not Paying Off Old Debt
Old debt can come back to bite you and cause you to make some credit score mistakes if you're not careful. You should never let an old debt go unpaid, especially if you want to obtain something like a mortgage. Call and work out a deal with the creditor so that you can get the debt cleared. It might stay on your credit report for many years, but the creditor will have to change the status to "paid." That will make a huge difference when you're trying to get a potential lender to assist you.
15. Using Your Revolving Credit Too Much
Revolving credit is a beautiful thing to have because it works like a revolving door. Your available credit goes up every time you make a payment, and you have access to the funds immediately. Unfortunately, some debtors make credit score mistakes when they use up their credit quickly after they make a payment. It's all about appearances in the credit world, and using your revolving credit that way doesn't look stable.
16. Not Addressing Credit Report Errors
You should check your credit report at least once every year. You can obtain a free credit report once per year from the three major credit bureaus. When you get your report, you will need to check for common credit report errors such as fraudulent accounts, balance mistakes, and so forth. You can dispute any information that you feel is incorrect. The credit bureau has to investigate every dispute you bring forth. Your credit score will drop if they end up having to remove something from your file.
17. Ignoring Collection Calls and Letters
Another one of the most common credit score mistakes that people make is ignoring collections calls and letters. You can save your credit score by answering the letters and agreeing to make small monthly payments on valid accounts. Ignoring a letter or call could be costly because the account can show up on your credit report and decrease your score drastically.
18. Not Updating Your Personal Information
Failure to update your personal information is another one of those credit score mistakes that go unnoticed sometimes. The credit bureaus should have your correct name, address, employment information, and phone number. That way, creditors can reach you if they need to, and your report will look legitimate when someone is trying to review you for a loan that you may have requested.
19. Not Checking Your Credit Report
As mentioned before, you should check your credit report once every year. You could miss out on inaccurate information and fraudulent accounts if you don't check your credit report. The credit bureaus make it easy to get your hands on at least one free report every year. You can order it from a site such as the Annual Credit Report, or you can go to the individual credit bureaus and request the information with each of them separately.
Review your credit report to ensure that all the information is correct. Dispute anything that you feel is incorrect, and the credit bureaus will investigate it. You might be able to bring your score up significantly just by doing that annually.
20. Adding Untrustworthy Users
Lastly, another one of the credit score mistakes that some people make is adding untrustworthy authorized users to their accounts. You have to make sure that anyone you add to your account is going to use the credit responsibly and not put you in the hole with impulsive behaviors. You'll also want to make sure that this person will pay the bill on time each month. You are ultimately responsible for anyone who uses your credit cards and accounts. Therefore, you must put a lot of thought into it before you allow someone to access your credit lines.
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