There are numerous mistakes that can be made with your credit that can all damage it. Sometimes these mistakes will only cause a little damage but at other times it will create much more damage. This is because your credit is very fragile.
Fortunately though, whenever you know what mistakes you shouldn’t make you can actually save yourself from years of frustration and thousands of wasted dollars. While some of the mistakes on the following list have a lot to do with common sense, there are others that you may actually be surprised by.
Nevertheless, the more that you know about your credit, the better equipped you will be to protect yourself while building your credit.
1. Closing Credit Cards
While you may not think that closing your credit cards would negatively affect your credit, it is probably the single worst thing that you could do. The only other thing that is as bad as this is missing payments. This is because one of the major factors that goes into determining your credit score is just how long your credit history actually is. So, even if you no longer want or need a particular credit card you shouldn’t close it.
Eventually the credit cards that you don’t use will fall off of your credit report anyway. This will take at least seven years though since federal law states that most items are allowed to be reported for this length of time. Even if you only use your credit card for a small amount every couple of months, you should still do so. Just make sure that you pay for it immediately. You may wonder why you would want to do this.
In Smart Money Secret, they say that the main reason is that it will actually help your credit score because part of this is determined by your utilization measurements, which means how much you use the credit that you have. So, even if you just use your older credit cards on an infrequent basis you will still be improving upon your credit score.
2. Missing Payments
Common sense would tell you that missing payments isn’t going to help your credit score any. Even so, a lot of people still tend to overlook this. Of course, the reason behind this is also common sense: the credit bureaus keep track of your credit history. Whenever you miss a payment can damage your credit score for up to seven years.
Some of the other things that will affect your credit score here include how frequently you miss payments, how recently you have missed the payment and how late the payment actually is. So, a payment that is only a week or two late probably won’t affect your credit score nearly as much as a payment that is 90 days or more late.
3. Settling Past-Due Or Collection Accounts
Settling occurs whenever a lender accepts a smaller amount that what you owe them so that they can close your account. For instance, if you owe $1,000 on a credit card that is long past due, the company may accept a payment of $500 so that they can close your file.
While this may sound like a good idea to you since it will lower your overall debt, lenders usually report this deficiency (the difference between the original amount that you owed and the settlement amount) as a negative item. This is why it is so important to maintain a 30% to 40% balance of your available credit limit.
4. Maintaining High Credit Card Balances
As was aforementioned, it is important to maintain a 30% to 40% balance of your available credit limit. The closer that you get to your available limit, the more your score will be affected, which is why it is best to keep your balance on the low end.
Your credit report is marked with an inquiry every time that you fill out a credit application and allow a lender to run your credit. Simply put, an inquiry is whenever someone asks for a copy of your credit report. While inquiries aren’t a bad thing, too many of them are because they can then damage your credit score. This is because credit bureaus have done statistical studies that show them that usually those people who have a lot of inquiries are bigger credit risks.
Therefore, it is a good idea to keep the number of inquiries down and only apply for credit whenever you really need to do so.
6. Believing That All Credit Scores Are The Same
There are several different types of credit scores available today because there are hundreds of credit bureaus in existence. One of the most common credit risk scores is the FICO (Fair Isaac Corporation). With this information in mine, you really need to know that the most common score is the one that will determine just how risky it is to extend credit to you.
The higher your credit score is, the bigger the risk you are considered to be. There are numerous websites that you can go to in order to find out what your credit score is. Regardless of which one you choose to use, it is important to make sure that you are getting the real deal. Of course, this is especially true if you will be paying for it.
7. Believing That All Credit Scores Tell The Same Thing
As was aforementioned, there are different types of credit scores and not every credit score will show that you are a credit risk. Some of the other scoring models that you should know about include:
- Insurance Risk. Insurance companies use credit scoring to determine how likely you will be to file a claim. If you have a lower score, this means that you will have a higher premium.
- Response Rates. The credit industry uses this to determine how likely you will be to respond to a pre-approved offer.
- Revenue Potential. Credit card companies use this to determine how likely you will be to use their card and thus generate revenue for them.
- Collect Ability. This is the one that is used by the collection agencies to determine how likely you will be pay what you owe.
- Bankruptcy Potential. If this score is too high, more than likely you will not be getting credit any time soon.
8. Not Understanding Your Credit Rights
The FCRA (Federal Fair Credit Reporting Act) was enacted in order to protect you as a consumer. There is a lot to this act, which you can read about at http://www.ftc.gov The important points are as follows:
- Permissible Purpose. There are only eight reasons why your credit file is permitted to be accessed. Two of the most notable reasons are: for your own report every 12 months and as a part of a legitimate business transaction, which means that you filled out an application and gave a business permission to view your credit report.
- The Right To Dispute. According to the FCRA you have the right to dispute anything in your credit report that you feel is inaccurate, misleading, untimely or unable to be verified. There is a lot of information available that will tell you how to dispute the items on your credit report.
- Your Right To A Free Copy Of All Three Credit Reports. The FACTA (Fair and Accurate Credit Transactions Act) is an amendment to the FCRA that allows you to get a free copy of your credit report from all three of the major credit bureaus every 12 months. You can do this by going online to http://www.AnnualCreditReport.com or by writing to the bureaus and requesting that they send you a copy.
9. Not Knowing About The Three Credit Reports And Three Credit Scores
Most people do not realize that the three major credit bureaus (Equifax, Experian and TransUnion) are private businesses that are ran for profit and thus compete against one another.
While each of them maintains information on approximately 250 million consumers none of them share information with one another, which is why there can sometimes be found discrepancies amongst the different bureaus.
This information is important to you if you need to repair your credit because a negative item may only be found on one report instead of on all three.
10. Not Having Any Credit Or A Credit Score
There are a lot of people who choose to completely avoid credit by using nothing but cash. This really isn’t a good idea though because the American credit system has been designed to determine just how credit worthy you are.
As such, it will reflect positively upon anyone who has shown that they are able to be responsible whenever they are managing their credit. Anything that you do that detracts from this is going to bring down your score.
So, whenever you don’t use your credit at all, you are doing something that could otherwise be rectified in a more beneficial manner by simply utilizing some self-discipline and a little bit of planning too.