We all know a good credit score is important. When your credit score is good, it’s easier to access loans and mortgages, and you don’t have to sweat when a new employer or landlord runs a credit check to assess you as a potential employee or tenant. When your credit score is bad, well, all those things become a bit more complicated.
Unfortunately, most people know more about the positives and negatives of credit scores than they do about keeping their credit score in the good books. In that place of misinformation, it’s easy to make avoidable mistakes with their credit.
Below we’ve compiled the top five most common mistakes that we see people make with their credit score and how you can avoid doing the same.
Avoiding credit statements and reports.
While it’s tempting just to make payments and avoid reviewing your credit reports and monthly statements, it’s a mistake to put it off for too long.
First and foremost, ensure that all the transactions on your monthly statements are accurate. We often make the mistake of thinking credit fraud comes in excessive amounts or trust that a canceled subscription is always canceled. The only way to take early and effective action against fraudsters or resolve incorrect charges is to review your purchase history every month and know every transaction is correct and accounted for.
It’s also essential to make it a practice of obtaining and reviewing your credit report annually. Any errors, minor or major, can hurt your credit score.
You can get your report from one of the two major credit bureaus (Equifax and TransUnion) for free once a year. Make sure you recognize all the accounts on your report: no credit accounts are still open that you thought were closed, all the credit limits are correct, there are no inaccuracies around payment timing or status, duplicate accounts, etc.
Never dismiss minor errors like incorrect, outdated, or misspelled addresses or names. All errors are worth filing a dispute with the credit bureau to have them resolved before they become issues.
Carrying a balance
Nearly a quarter of Americans think carrying a balance on a credit card improves their credit score. The truth? Maintaining a balance hurts your credit score more than it helps it, and the interest charges end up costing you much more in the long run.
Owing to a large balance or maxing out your credit card communicates being overleveraged or dependent on debt, both signs of risky behavior to lenders – even if you pay on time. The higher your balance, the higher your minimum payments, making your total balance that much harder to pay off. If this causes you to go over your assigned credit limit, your credit score will be affected by further penalties.
It’s also important to note that a “large amount” is not at all defined by a dollar amount and entirely dependent on your total credit limit. It all has to do with your credit utilization ratio, explained more in the next section.
Rejecting a pre-approved limit increase
If you’re responsible with your credit, your bank may offer you an automatic, pre-approved increase to your credit limit. It might be easy to think it’s best to decline and keep a lower limit – you should consider it.
This again relates to credit utilization, the ratio between your total credit limit and the size of your balance—essentially, how much credit you have that you are not using.
This is important because your overall debt load is measured as a percentage of how much you owe relative to your total credit limit, not the actual amount of your balance. So if you carry a $1500 balance on a credit card with a $2000 limit, you are viewed as more reliant on debt than if you were to have the same $1500 balance on a credit card with a $4000 limit.
In sum, if you can trust yourself to keep the same or lower balance on a credit card no matter your credit limit, it is always better to take the increase when it’s offered. If not, and you know that a new, higher credit limit will mean an increase in spending and debt, go with your first instinct and decline.
Only making the minimum payments
While at times, it may only be feasible to make minimum payments, it is not advisable to make this standard practice. The higher your monthly balance, the more interest you’ll pay. If you’re not making an effort to consistently pay off as much of your balance as you can, your debt will either stay the same or increase. This would add months – or even years – to the amount of time it will take to pay it all off.
If you’re curious just how long you’d be looking at to pay off your debt, credit card statements are required to show how long it will take you to pay off your balance paying only the minimum amount and how much more you’ll be spending on interest over that time.
Not knowing your APR and fees
Information is the best tool for managing your credit. Many credit applications and pre-approvals come with deceptively low interest rates or fees, distracting you from reading the fine print in the cardmember agreement to understand it all effectively.
We’ve compiled a list of key terms you should know when it comes to fees and annual purchase rates (APR):
- Annual fee: the yearly charge for holding the card
- Late payment fee: the first time you pay late, you’ll incur a fee of up to $29. Further late payments made within six billing cycles will bump that fee up to $40.
- Balance-transfer fee: any transfer of debt will incur a 3% – 5% fee.
- Foreign transaction fee: any purchases you make outside of the U.S most often come with an additional cost, usually around 3% per transaction.
- Purchase APR: the yearly interest rate charged on your purchases when you carry a balance month-to-month.
- Balance transfer APR: similar to the purchase APR, but this interest rate is applied to balance transfers.
- Penalty APR: you may be charged a higher interest rate than your regular APR when your balance is paid late.
If you have more questions on best practices when it comes to maintaining a good credit score or remedies to turn a bad credit score around, reach out to us, and we’d be happy to help!