When determining your financial health, your credit score is one of the most important vitals tested. Having good credit is an essential factor in many benefits, including qualifying for the best mortgage rates, personal loans, and student loans — and achieving other life goals. Developing a good relationship with credit-building is crucial in creating and maintaining good credit habits.
The root of this, of course, is to learn about and avoid common credit mistakes that can hinder your progress or, worse, damage your credit score in the long run. With knowledge of the factors that affect your credit score and avoiding these mistakes, you’ll stay on the right track to achieving and maintaining healthy credit. Our fee-only financial planners highlight the top 5 credit mistakes below!
1. Not Monitoring Your Credit Often
Checking your credit score routinely is a good way to keep track of your progress. Additionally, you’ll quickly be able to detect potential issues and address them before they create any significant damage.
Several resources give you access to your credit report and score. Through AnnualCreditReport.com, you can access all three of your credit reports for free once every 12 months. Other sources, like Experian or Credit Karma, provide free access to your credit scores anytime and update them regularly.
You can also access your scores through certain banks and lenders or by working with a credit counselor.
2. Not Paying Bills on Time
Payment history has a heavy impact on your credit scores. Even missing just one payment can damage your credit. On top of late fees and penalties, a late payment on your credit report will remain for several years.
However, the good news is that late payments on loans or credit cards are reported on your credit only if you’re late by 30 days or more. Still, save yourself the trouble of fees and stick to positive habits by paying your bills on time to ensure your credit is in good standing.
To help keep you on track, request payment reminders or even set up autopay. Just ensure you have enough money each month to cover your bills.
3. Only Making Minimum Payments
Paying just the minimum amount due on a credit card that carries interest will not only cost you more money in the long term. It can also damage your credit score.
Continuing to use the credit card after only paying the minimum balance causes you to continuously increase your credit card balance over time. This also increases your credit utilization ratio, which is the percentage of your available credit based on your usage at any given time. The amount you owe is an important factor in your credit score, so allowing a high utilization rate, above 30%, to build and last could have significant damage.
Paying off your credit bills so that you’re maintaining a utilization rate under 30% is a great tactic to keep your credit in good standing.
4. Too Many Credit Applications
Applying for multiple credit cards and/or loans in a short amount of time can also damage your credit. When applying for credit, the lender checks your credit report to determine whether to approve your application. These checks are called hard inquiries.
Each time a hard inquiry occurs, it is held against your credit because it is viewed as an additional credit usage which adds a layer of uncertainty for the lender. Too many hard inquiries can harm your credit score, labeling you as a riskier borrower and reducing your approval rate.
To avoid this, research your likelihood of being approved for a line of credit before completing an application.
5. Closing Credit Card Accounts
Canceling credit cards can also damage your score. While fewer lines of credit limit your risk of fraud and default, closing a credit card causes you to reduce your overall available credit while keeping your current usage the same. This causes your total credit utilization rate to increase, which will hurt your credit score.
Turn to TrueNorth Wealth for Help!
It can take years to improve your credit score, but it’s never too late to start. Maintaining positive habits like paying bills on time, routinely checking your standings, and avoiding common mistakes will keep your credit healthy and continuously improving.
Working with an advisor can help to establish healthy credit-building habits and set you up for success in the long run. At TrueNorth Wealth, our goal is to ensure you achieve yours. We offer fee-only holistic financial planning in Boise, ID, and throughout Utah that will work with your circumstance to find the most optimal way to accomplish financial security.
