Scary Credit Mistakes to Avoid
We’ve all heard a credit horror story or two in our day. For example, someone opens up a store credit card to save on their purchase, they forget to pay the bill, and boom—they have a badly bruised credit score on their hands.
To help you avoid being the next credit horror story others use as a cautionary tale, let’s look at five scary credit mistakes that are actually really easy to avoid when you know how to look out for them and how you can make sure you don’t fall prey to them.
Forgetting to pay your bills on time
Life gets busy and it’s easy to let something like a credit card bill slip your mind. While paying a late fee or small amount of interest is annoying, the bigger problem that arises is that paying your credit card bill or making a loan payment late can majorly damage your credit score. On-time payments are the most important factor in most credit scoring models like FICO. By simply making your payments on time, you not only avoid damaging your credit score but you improve it. Save yourself a credit headache and set calendar reminders for bill due dates or embrace auto-pay features to make sure you don’t accidentally miss a payment.
Only paying the minimum balance
While you won’t have a late payment hanging over you if you pay the minimum required payment on your credit card, you still risk damaging your credit score if you don’t pay off your balance in full. You get hit hard here in two ways—you wrack up interest charges that make your debt grow and you keep your credit utilization ratio higher than it needs to be (we’ll talk more about that in a minute).
Maxing out your credit limit
Speaking of your credit utilization ratio—you want to keep it nice and low. Your credit utilization ratio measures how much of your available credit you’re using and the lower you can keep this ratio the better (although 30% or lower is a good rule of thumb). One of the fastest ways to improve your credit score is to pay off your balance on revolving credit accounts such as home equity lines of credit, personal lines of credit, and credit cards.
Closing old credit cards
This scary credit mistake can sneak up on you when you least expect it. Imagine this—you have an old credit card you no longer use because you now qualify for better rewards credit cards that offer higher rates of cash back and travel points for your purchases. It may seem like the smart thing to do is to close that old card so it can’t get stolen or lost. It can feel counterintuitive, but closing old credit cards can actually hurt your credit score because that lowers the average age of your credit accounts and lenders like to work with borrowers who have a long history of managing credit well. Keep the card open, stash it in your safe, and add a small recurring charge like your Netflix subscription to keep the card active and working in your favor.
Want to avoid making scary credit mistakes this fall? We can help you get a plan in place to manage your credit the right way.