Long-Awaited Clean Credit Can Be Erased By Easy-to-Make Personal Finance Errors

Millions of consumers saw their credit scores take significant hits during and even following the recent recession and as such have been trying to get their standings back to where they once were just a few years ago with mixed success. Those who have been able to achieve those goals, for example, have often done so by clearing up simple mistakes they made in the past.

While many borrowers may not know exactly what makes up their credit score, and therefore could be unaware of the best ways to resolve any issues they have that are weighing those ratings down, the truth is that in many cases, very common mistakes are all that stand between them and good or even excellent credit. As a result, those who take the time to understand what lowers their scores, and the very easy pitfalls that caused that to happen, will likely be able to get their standings back on track in relatively short order.

What is most common?
Fortunately for borrowers who want to rebuild credit ratings they've damaged in the past, two of the most common credit missteps are also the easiest to address, though it should be noted that both will take time and dedication even if the fixes are simple. Perhaps the most common mistake is one that accounts for 30 percent of borrowers' scores: carrying too much credit card debt.

While many consumers may have heard the adage that lenders like to see borrowers with large amounts of debt, that's actually not true. In fact, the opposite is very much the case: The more owed, the lower a score will be. Generally, lenders like to see cardholders using as little of their limits as possible, and those who want to max out this one portion of their scores will typically have debts totaling 30 percent of their cards' combined limits. Any more than that, and one's scores will necessarily begin to decline. Thus, paying more into these balances and getting them down to that low threshold will increase ratings and get borrowers back on the track to healthier credit.

Another extremely common mistake borrowers make is missing deadlines. While it's unlikely that anyone thinks this is actually beneficial, it may be more damaging than many suspect, as payment history accounts for 35 percent of a borrower's scores. Lenders never want to see borrowers miss a single deadline, even if it's by one day, and so missing any deadline just once can undo years of hard work to keep all accounts in good standing.

As a consequence, those who have missed any number of due dates should really take the time to right their course and make sure every one of their bills is sent in on time and in full for a period of several months or sometimes more, depending upon the frequency with which they've missed them in the past. While this will not erase their past mistakes, it will at least show lenders that they were serious about getting their finances back on track in this way, and thus help to improve their scores.

Other issues that may be lingering
Of course, those two factors make up 65 percent of a score, and are therefore significant, but that still leaves another 35 percent of a score unaddressed. For instance, 15 percent is made up of the average age of the accounts listed in a person's name, and as a result, borrowers who successfully reduce any of their credit card accounts to zero should therefore try to avoid closing them out altogether, and instead keep them open to buoy both this aspect of their scores and keep their credit utilization ratio as low as possible.

The final 20 percent of scores is made up of two factors accounting for 10 percent each. The first is the mix of credit account types, and in general lenders like to see borrowers who have larger amounts, such as a mortgage, credit cards, auto loan, student loan, and so forth. This shows them that a borrower can successfully juggle a number of different accounts at once. The second is the number of recent applications for credit filed by a borrower. More is considered to be detrimental to scores, because it indicates to lenders that borrowers may be having cash flow issues.

Finally, there are occasionally unfair markings listed in borrowers' names that are having a drag on their credit standings without cause. These can be found by ordering copies of one's credit reports regularly and checking them over closely for such entries. If any are discovered, working with a credit repair law firm may be able to help address the situation and return borrowers' standings to where they otherwise deserved to be.