You use your credit card regularly, pay the bill every month and avoid taking on too much debt. Your credit score must be in great shape, right?
Maybe not. Even the most well-intentioned credit users can end up harming their credit by making simple mistakes. And having good credit is important, even if you don’t plan to borrow money. For instance, about half of Americans don’t know that bad credit can restrict their choices for cellphone service, according to a NerdWallet study.
Here’s a look at the most common credit mistakes that can lower your score.
Building credit is a bit of a Catch-22. You have to use credit to establish a credit history, but you can’t get credit unless you already have a good credit score. Unfortunately, avoiding credit cards and other loans completely means you won’t have any credit history or score. That’s bad news even if you don’t have any plans to borrow money, as your credit score affects many major areas of your life.
The fix: The good news is you don’t have to spend irresponsibly or go into debt to build credit. Putting just a couple of recurring expenses, such as your cellphone bill, groceries or gas, on your credit card each month and then paying the balance by the due date will get the job done.
Only Sticking to Credit Cards
Although opening and actively using a credit card will help you establish good credit, it’s only one piece of the puzzle.
“People with a mortgage, car loan, credit card and other types of loans will have a higher score than someone with just credit cards,” explains Randall Yates, founder and CEO of The Lenders Network. That’s because 10 percent of your credit score is dependent on having a mix of credit, which shows lenders you’re capable of handling various types of credit.
The fix: If you don’t have a great mix of credit, Yates suggests getting a personal loan from your local bank or credit union instead of another credit card to improve your score.
Whether you finally paid off one of your credit cards or have one you don’t use anymore, it might seem like closing the account is the responsible thing to do. Unfortunately, closing a credit card account is a fast and easy way to lower your credit score.
“Canceling a credit card – even a zero-balance credit card – can have an adverse impact on your credit score in at least two ways,” notes Zack Friedman, founder and CEO of Make Lemonade, a personal finance website that allows you to shop for loans and other financial services.
First, he says, canceling a credit card reduces the amount of credit you have available; if you carry a balance on any other cards, your credit utilization will increase. Thirty percent of your FICO credit score is impacted by your credit utilization ratio, which is your total debt owed divided by your total credit available. Experts recommend keeping your credit utilization ratio under 30 percent. Second, if that card is quite a bit older than the rest of your accounts, it could shorten the average age of your credit history.
The fix: Before you do anything, learn how to close a credit card the right way. In many cases, it probably makes more sense to keep the account active and simply cut up the physical card.
Asking for a Credit Limit Increase
Keeping your credit utilization low is important for maintaining good credit. If you have a high ratio, increasing your credit limit can instantly improve it. But before you do, think twice.
When you ask for a credit limit increase, the bank will need to re-evaluate your financial situation and decide whether to grant one. Often, this means a request to increase your limit is treated the same as a new application for credit, resulting in a hard pull on your credit reports.
The fix: Don’t officially apply for a credit limit increase until you’ve talked to a representative about your bank’s policies. If you have a strong relationship with your bank – for example, you hold existing loans or maintain large balances in your deposit accounts – it might grant an increase without pulling your credit. Sometimes, you will also receive increases automatically.
Opening Retail Cards for the Discounts
As a savvy shopper, you look for opportunities to save whenever and wherever possible. So when the guy behind the Macy’s counter offers you an additional 20 percent off your jeans if you open a store credit card, why wouldn’t you say yes?
Having too many credit cards is an easy way to overspend and fall into a cycle of debt. Even if you’re a frugal spender, however, applying for and opening too many cards is a red flag to lenders. Multiple hard inquiries on your credit report and a string of fresh credit accounts can look like you’re desperate to cover your bills.
The fix: When it comes to saving money on shopping, look for coupons and sales rather than credit card promotions. If you happen to shop at one store a lot, a retail card might make sense. But more often than not, you’ll save more by avoiding them.
Carrying a Balance
According to the NerdWallet study, more than two in five Americans believe having a small balance on a credit card each month can give their credit scores a boost. The truth is that there’s never a good reason to carry a balance if you can help it.
The fix: You have to use credit to build credit, but it doesn’t mean you have to spend your hard-earned money on accrued interest. As long as you actively charge expenses to your credit card and pay the balance off by the due date, you’ll work toward having a strong credit score.
Maxing Out Your Credit Cards
It might not seem fair, but using the full credit line extended to you by a credit card issuer will negatively affect your credit score – even if you pay off the whole balance every month.
That’s because the date your balance is reported and the date your payment is due are often different. For example, say you have a $2,500 credit card limit and spend $1,500 during the month. Your issuer then reports that $1,500 balance to the credit bureau. Even though you plan to pay it all off the following week, you’re stuck with a credit utilization ratio of 60 percent regardless.
The fix: According to Yates, an easy solution is to call your credit card issuer and ask when it reports your balance each month. Make sure you pay your balance off a few days before that date rather than the actual due date. If you aren’t able to determine what day your balance is reported, consider making a payment every two weeks to keep your balance low throughout the billing cycle.
Failing to Check Your Credit Reports
“Ignoring your credit report is one of the biggest financial mistakes that you can make,” warns Friedman. “With the recent Equifax data breach, it is even more important that you review your credit reports from all three credit bureaus.”
Checking your credit reports from all three of the major bureaus – Experian, Equifax and TransUnion – on a regular basis is the best way to find and fix credit report errors that could hurt your credit score.
The fix: You can access all three credit reports for free from AnnualCreditReport.com, which is the only site federally authorized to provide official credit reports at no cost. “Make sure to report any errors or suspicious transactions to the relevant credit bureaus,” says Friedman.
Paying your bills on time is the most important thing to do if you want to maintain good credit. Your payment history accounts for 35 percent of your FICO credit score, and even one missed payment can seriously set you back.
But just because you pay off your credit card and make your student loan payment every month doesn’t mean you’re in the clear. Leaving library books on your shelf or stuffing unpaid parking tickets in your glove box could land you in collections.
The fix: Don’t be lazy about tying up seemingly insignificant loose ends. Make sure you pay all your bills, even if they’re not related to credit cards or loans. And if you borrow a book from the library, remember to return it.
Overspending for the Rewards
Many people dedicate their spare time to – or even make a career out of – figuring out how to earn the most credit card rewards possible, whether in the form of cash back, travel miles or points. Rewards credit cards are a great way to earn money back on money you have to spend anyway.
But it’s easy to convince yourself a purchase is worth it because you’ll earn points back – even if that extra charge means accruing interest and bumping up your credit utilization ratio. It’s tempting to rack up a balance in the name of earning credit card rewards, but the negative effects of having too much debt on your credit score will quickly negate those savings.
Paying Off Old Collections Accounts
If you’ve had an old bill sitting in collections for years, paying it off when you finally have the funds might seem like the right thing to do. But if you’ve waited too long, that seemingly good deed could come back to bite you.
Collections accounts majorly hurt your credit score, but the older they are, the less impact they have. “When you pay old bills in collections, you cause them to become ‘current,’ and that gives the appearance of recency,” explains Dan Green, founder and CEO of financial education website Growella. New collections activity can send your score plummeting all over again.
The fix: Don’t speak with any debt collectors about the account in question. Even acknowledging the debt can restart the clock. Instead, make a written request that the collections agencies send you proof that you owe the debt and that they’re authorized to collect it. In some cases, they might not be able to do so, and you can dispute it with the credit bureaus.
Working toward good credit is a great goal to have. Make sure you don’t shoot yourself in the foot by making one of these mistakes.