Guest article from the Better Credit Blog.
Credit plays an extremely important role in most consumer’s lives. Our credit rating can impact everything from our housing situation to our cost of education. Therefore, it’s important to avoid making mistakes that will result in damaging your credit.
Keep reading to learn about the credit mistakes you may not even know you’re making.
1. Closing Unused Credit Card Accounts
Closing unused credit cards is probably the most common credit mistake people make. Just because you don’t use a particular credit card doesn’t mean that it doesn’t significantly contribute to your credit score.
When you close credit card accounts, even unused credit cards, your credit score can be negatively affected in a couple of ways.
Your credit score is partly determined by how much of your total available credit is currently being used. In other words, your credit card balances compared to their credit limits. This is called credit utilization.
Generally, the lower your credit utilization the better. When you close a credit card, you’re reducing your total available credit and therefore increasing your credit utilization, which reflects negatively on your credit.
In addition, when you close an unused credit card, that credit card will no longer be building positive credit history. Since your credit score is in part determined by how long you’ve had your credit cards, closing the account prevents it from contributing to the length of your credit history.
It’s also worth noting that when you close a credit card account, any negative entries such as late payments or charge offs will remain on your credit report. Closing an account does not erase its payment history, according to Better Credit Blog.
2. Not Challenging Inaccurate Information on Your Credit Report
A recent Federal Trade Commission study found that nearly 1 in 4 Americans have at least one error on their credit report that could negatively affect their credit score.
This means that there is a decent chance you have errors on your credit report that you could easily dispute and in turn potentially see a bump in your credit score.
The mistake that people often make is that they simply don’t monitor their credit report and score on a regular basis, and are therefore unaware that inaccuracies may exist.
You can easily prevent credit reporting inaccuracies from negatively affecting your credit score by proactively monitoring your credit on a monthly basis and disputing errors as soon as they are reported.
3. Frequently Applying For Credit Cards
When you apply for a credit or store card, it’s reported on your credit report as a Hard Inquiry. A hard inquiry indicates that you’re shopping around for credit.
Generally, having one or two hard inquiries on your credit report isn’t going to negatively affect your credit score. However, when the hard inquiries start to add up, you will see a drop in your credit score.
Many people apply for every store card they come across without even knowing it could be potentially damaging to their credit score.
Hard inquiries remain on your credit report for up to two years, however they can only negatively impact your credit score for up to one year. In order to maximize your credit score, avoid applying for new credit too frequently.
4. Not Paying Attention to Your Credit Utilization
Credit utilization has a significant impact on your credit score. Yet, very few people understand exactly how it works.
Credit utilization applies to revolving debt such as credit cards. It is the ratio of credit card balances to credit limits. To give you an example, if you have a credit card with a total credit limit of $2,000 and your current balance is $1,000, the credit utilization for that card is 50%.
As a general rule, you should try to keep your credit utilization under 20% on all your credit cards. Once you start getting above 20% on any individual card, your credit score will start be affected.
Keep an eye on your credit utilization each month and avoid maxing out, or nearly maxing out, any of your credit cards.
5. Neglecting to Rebuild Bad Credit
Bad credit can cause many problems in your life. From being unable to purchase a house or vehicle, to paying higher utility bills. The good news is bad credit can be fixed.
Many people make the mistake of neglecting to take proactive steps in order to better their credit situation. Don’t believe that rebuilding bad credit is an extremely difficult and time consuming endeavor. Rather, by following a few steps, you’ll find that improving your credit is well within your reach.