Avoidable Things People Do That Accidentally Crushes Their Credit Score
A credit score is a gateway to financial opportunities and unfortunately boils down to a single score reflecting your fiscal health and influencing lenders’ decisions. Unfortunately, mistakes in managing credit are easy to make and often go unnoticed until significant damage is done. Expertly navigating the complexities of credit management can safeguard your score against common pitfalls.
We’ll unveil 21 critical errors to avoid, ensuring your financial stability remains intact and you’re score doesn’t needlessly drop.
Missing Payments
Although obvious to most people, #1 is not to miss payments on your debt obligations. When you miss a payment, it’s not just a small oversight; it’s a signal to creditors that you may be a risk. These missed payments are reported to credit bureaus, significantly lowering your score. Maintaining a record of perfect payments is key for a maintaining a top credit score.
Applying for Too Much Credit
Every time you apply for a credit card, the lender performs a hard inquiry on your credit, which can slightly decrease your score. People often underestimate the impact of these inquiries, which can accumulate and cause more substantial damage over time. Of course these aren’t huge negatives, especially if performed once in a while, but it’s always a good idea not to apply for too many credit cards in a short period of time.
Closing Old Credit Accounts
The length of your credit history contributes to your credit score calculation. Closing your oldest credit accounts can shorten this history and negatively affect your score. It’s generally a good idea to keep older accounts open, even if you’re not using them frequently. While this might seem contradictory to the rule above, the general rule is don’t apply too often, but once a line of credit is opened you should keep it opened, even if you don’t use it.
Carrying High Balances
Utilization of your credit limit plays a major role in your credit score. Carrying high balances relative to your credit limits suggests to creditors that you’re overly reliant on credit. It is advisable to keep your balances well below 30% of your credit limits.
Only Having One Type of Credit
Diversifying your credit with a mix of installment loans and revolving credit lines can positively impact your score. Reliance on just one type of credit does not demonstrate to creditors your ability to manage different types of credit. Aim to build a varied credit portfolio.
Avoiding Credit Entirely
Some people choose to avoid credit cards and loans entirely, thinking it will keep their finances simple. However, without any credit history, credit bureaus have nothing to score, which can be just as damaging as having bad credit. Responsible use of credit is key to building a good credit score.
Paying Only the Minimum Due
Making only the minimum payment on credit accounts can lead to prolonged debt and significant interest charges. It also keeps your balances high, which affects your utilization rate. Aim to pay off balances in full, or at least pay more than the minimum.
Co-Signing Loans Indiscriminately
Co-signing a loan makes is a huge undertaking as you’ll be legally responsible for the debt. If the primary borrower fails to make timely payments, your credit score will suffer. Think carefully before co-signing, understanding the potential consequences on your own financial health.
Ignoring Credit Errors
Many people neglect to check their credit reports regularly for errors. Errors, which are not uncommon, can include outdated information or accounts fraudulently opened in your name. Regularly reviewing your credit report allows you to catch and rectify these mistakes promptly.
Not Updating Personal Information
Outdated personal information can lead to mix-ups or missed communications from lenders. Ensure your contact details are current with all financial institutions and credit agencies. Regular updates help ensure that you receive all critical correspondence regarding your credit.
Using Cash Advances
Cash advances from a credit card are treated differently from regular purchases and often come with high fees and interest rates. This type of borrowing indicates financial distress to creditors. Avoid cash advances unless absolutely necessary.
Ignoring Interest Rates
Not paying attention to the interest rates on your credit accounts can lead to costly debt accumulation. High-interest debts should be prioritized for payment to minimize total expenditure on interest. Shopping around for better rates can save you substantial amounts in the long run.
Overlooking Identity Theft
Identity theft can have catastrophic effects on your credit score and unfortunately isn’t uncommon. Monitoring your financial accounts for unusual activity is essential. Immediate action upon discovering any fraudulent activity helps to mitigate potential damage to your credit.
Frequent Job Changes
Lenders view frequent job changes as a sign of financial instability, which can indirectly affect your credit score. While changing jobs for better opportunities is often beneficial, stability in your employment history is also valued by creditors. Ensure you have a good reason and better prospects before making a job switch.
Not Using Credit Monitoring Tools
Credit monitoring tools help you keep track of changes to your credit score and alert you to potential issues. Many people fail to utilize these tools, missing out on early detection of problems. Many services offer free or low-cost options that can help you stay informed.
Not Understanding Credit Terms
A lack of understanding about the terms of your credit agreements can lead to breaches of contract, such as missing hidden fees or payment deadlines. Always read and understand all credit agreements thoroughly before signing. Knowledge is power when it comes to managing your credit.
Opting Out of Automatic Payments
Automatic payments can prevent late payments by ensuring your bills are paid on time every month. Some people avoid setting up automatic payments due to concerns over losing track of their spending, but this feature is instrumental in maintaining a consistent payment history. Consider using automatic payments alongside regular account monitoring to keep your finances in check.
Loan Default
Defaulting on a loan is one of the most severe actions that can devastate your credit score. It reflects an inability to meet your financial obligations and remains on your credit report for years. Avoid defaults by seeking financial advice or renegotiating your loan terms if you’re struggling to make payments.
Being Unaware of Your Credit Limit
Not knowing your credit limit can lead to accidentally exceeding it, which can incur fees and negatively impact your credit score. Creditors might view this as irresponsible borrowing behavior. Always be aware of your limits and monitor your balances regularly.
Josh Dudick
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.