Having good credit is like a board game. If you know the rules, you'll have a lot more fun playing. It’s not always that easy to figure out the credit game. Sometimes there are some simple credit mistakes that are causing your credit score to be lower than it should be.
Honestly, there’s a lot of amazing things that good credit can unlock for you. It can help you rent a great house. It can qualify you for credit cards that give you points or cash back on your purchases (and protect you from things like fraudulent charges). Good credit can even save you money on car insurance.
Do you know what your credit score is? I use Credit Karma to check my credit on a monthly basis. You can sign up for FREE using this link.
If you’re ready to work on your credit, you may want to focus on the 4 main credit mistakes that most people make. They’re easy to fix. I’ve even seen my credit score jump by 52 points in 1 month just by correcting the first mistake.
Credit Mistake 1: You forget or are late on payments
The number one way to destroy your credit is to not pay your bills. Lenders make good money if you pay them back. So, if you’re consistent with paying your bills, they’ll be more likely to give you a good rate.
Take the first step and set up as many payments as possible on auto draft. This will make sure that you don’t wind up forgetting.
If there’s not a way to auto-pay (or they charge you a fee), set up reminders on your phone. Be diligent about your payments. Do whatever it takes to never miss.
Ok, I’m going to lay on the guilt here. Whether it’s something you bought on the credit card, your house, your car, you borrowed money for this thing. You’re enjoying the benefit. You need to pay them back.
Credit Mistake 2: You use too much of your open lines of credit
Open lines of credit are things like your credit card. Also, some people have personal lines of credit to draw on that have no physical piece of plastic associated with them.
You may have a credit card with a limit of $10,000. If you use the whole $10,000 you’re maxed out, or using 100% of the available credit. If you’re using $2,000 you’re at 20%.
Ideally, you want to stay under 20% of the open lines of credit. That means, when your credit card statement comes, your final balance won’t be more than 20%.
You can spend more than 20% in a month, as long as you keep the balance under 20% by the end of the month.
For example: I like to book my vacations on my credit card so that I can get points. Say my credit limit is $10,000 but my vacation is $3,000. As soon as the travel transaction hits, I’ll pay $3,000 from my vacation savings on my credit card.
There are a couple of things that don’t count toward that 20% number. Things like your mortgage or a car loan are not part of your open lines of credit because, there is an asset (the house or car) that they can take away from you if you don’t pay. You can’t take out more or less as you choose, you have a set amount that they give you at the beginning and you pay it over time.
Credit Mistake 3: You got too many inquiries for your last line of credit
A credit inquiry is when someone pulls your credit history and credit score. Any time you ask for credit, the lending organization will pull your credit history. For example, when you apply for a mortgage, when you finance a car, when you apply for a credit card.
Even when you’re not asking for credit, companies may require your credit information. For example, if you are moving out of your college dorm into your first apartment and setting up electricity, the electric company may pull your credit.
Credit inquiries are normal, but your credit score drops when you get too many credit inquiries at one time. That’s because you are more risky. Keep in mind that credit inquiries can stay on your report for up to 2 years.
Consider two potential people applying for a mortgage: Sam has applied for 14 credit cards in the last year or Amy who had one inquiry 12 months ago for a car loan. Who do you think is more likely to pay the mortgage on time?
Sam’s growing collection of credit cards does not look good to the banks because it signals she may be struggling to pay her bills. It might not be fair, and it might not even be a good indicator of Sam’s situation (maybe she only signed up to get a ton of free points and clothes). Either way, it’s the world we live in, so Sam should lay off on applying for new cards.
I learned this mistake when I applied for my first mortgage. I went on Lendingtree.com and input my information. Then banks started calling me with offers, and they said to confirm my rate they needed to pull my credit. I said sure! Why not get a bunch of competing offers? Well here I am 1 year, 10 months later, still waiting for the last few inquiries to roll off my credit report in 2 months.
Lesson Learned: A company has to ask you permission to pull your credit. Don’t give them permission, unless you absolutely must. Ask if there is another way to be approved. Utility companies sometimes allow you to put a deposit down, instead of pulling your credit.
The best way to keep credit inquiries low is to space them out. I like to use creditkarma.com to check how many open inquiries I have, and wait until I have 4 or fewer to make any loan or credit card applications.
Credit Mistake 4: You keep applying for new credit
Banks like to see that you have a long, steady history of managing your credit wisely. To measure this, they look at how long your credit lines have been open. Here’s the catch, they only look at open credit lines.
If any piece of the credit game is unfair, it’s the length of credit history. As a young person, you just don’t have a lot of time under your belt to fight this.
Banks take all of your open lines of credit, including your mortgage, your credit cards, and your car loans. They calculate how long those lines of credit have been open (in years and months) and then they average them together.
For example: Anna is 25 years old. She has 1 credit card that she’s had since she graduated college, open for 3 years 4 months. She also bought a car after her last promotion and has been paying off the car for 12 months, and she just bought a house and has had a mortgage for 2 months. Her average length of credit history is 1 year 6 months.
Anna probably doesn’t need much more credit right now, but she may have trouble getting access to credit if she wanted it because she doesn’t have a long payment history on those accounts.
There are two ways people ruin this portion of the credit score. First, they open a bunch of new lines of credit (like Anna). Opening store credit cards for the discounts, financing furniture because there’s no interest for the first 5 years, those types of things are just unnecessary hits to this factor of your credit score.
Second, they close old credit lines. You may not be happy with the benefits of the oldest credit card in your wallet, and if that’s the case, cut the thing up and don’t use it. But do me a favor and don’t close the account until you have enough other lines of credit that have at least 5 years of history.
The only exception where it may be better to close the card is if the card has hefty fees. If that’s the case, weigh out whether the fees that you’re saving will offset anything else you’re doing with credit.
Some parents co-sign a credit card for their children, which is really helpful to start building credit early. However, if this is you, you’ll need to be careful as you consider keeping that card into adulthood. You may not want your parents snooping on your purchases, but if you decide to close it, your credit score may suffer. Get another card, and start building that history, but don’t close the parent’s account until you’ve got plenty of history on your own.
If you can clean up these mistakes, you can raise your credit score fast, and reap the benefits of good credit. It comes down to 4 simple things: pay on time, only use 20% of your credit limits, don't apply for new credit you don't need, and keep an eye on old credit accounts.
What have you done to raise your credit score? Leave your answer in the comments!
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