You need a good credit score in order to buy a home, get financing for a car, sometimes even get or keep a job or security clearance. Here are five common mistakes that can lower your credit score, and tips from the FINRA Investor Education Foundation on how to avoid them.
Paying late – Even one day late on a payment can lower your credit score, because lenders see it as a sign of possible unreliability. It’s best to pay in full and on time. If you can’t, pay at least the minimum on or before the due date.
Maxing out your credit card – Charging so much that you are at or near your credit limit is called “overutilization,” and it makes creditors nervous because it makes your debt-to-credit ratio too high. Try to limit your balance to 30% or less of your credit limit. Having available credit is an especially good idea if you don’t have a “rainy day fund” for emergencies.
Cancelling old credit cards – Sounds counterintuitive, but cancelling older accounts can work against you, even if you no longer use the cards. The length of your credit profile is based on the longest-held card or loan, and creditors like to see borrowers with a long credit history, especially if you’ve paid on time, every time. Better to use the oldest card once in a while to keep your credit profile’s longevity intact.
Not using the credit you have – Again, it sounds counterintuitive, but paying for everything in cash, while a good financial practice in general, does nothing to improve your credit score. Your best bet is to have a good payment history with both installment loans (such as car payments) and revolving accounts (like credit cards). Some people develop good habits like paying with cash for necessities (utilities, groceries, etc.) and using credit for occasional “treats” like dining out or a new outfit.
Applying for more credit than you need – Store discounts, offered when you apply for and use a store credit card, are tempting but every time you apply for a new card, you trigger a credit inquiry on your credit report. The more inquiries you have, the riskier you appear to creditors…and that can lower your credit score.
And here’s an idea from a savvy BBB consumer: If you are not sure you can pay off your full credit card balance every month, take advantage of the ease of electronic bill paying and send two monthly payments. Set up a payment for the minimum amount due and have it automatically sent a day or two before the deadline every month. That way, you’ll never be hit with a late fee or lose points on your credit score. Then send a second, larger payment as soon as you can (pay day, or when you pay your other bills), either for the rest of the balance or for as much as you can swing that month.
For more information on credit ratings, investments, saving for retirement, and avoided investment scams, visit www.saveandinvest.org