Your credit score is a three-digit number that represents your creditworthiness. It plays a crucial role in your financial life because it is used by lenders, landlords, and other financial institutions to determine your eligibility for credit, loans, and even some jobs. Your credit score can also affect the interest rates you are offered and the terms of your loans.
Therefore, it is important to maintain a good credit score. However, certain mistakes can hurt your credit score. In this article, we will discuss five common mistakes that can negatively impact your credit score and how to avoid them.
1. Late Payments
Financial experts from one of the leading loan vendors in the country, Andromeda, suggest that our payment history is one of the most important factors determining your credit score. Therefore, making late payments on your credit accounts can significantly negatively impact your credit score. Payment history accounts for about 35% of your FICO credit score, the most commonly used credit scoring model.
If you have missed payments, catching up as soon as possible is important. Late payments can stay on your credit report for up to seven years, and the more recent the late payment, the more damage it can cause to your credit score.
How to avoid this mistake?
- Set up automatic payments for your credit accounts.
- Set up payment reminders or alerts to avoid missing payments.
- If you can’t pay on time, contact your creditor and try to make alternative arrangements.
2. High Credit Utilization
Your credit utilization rate is the amount of credit you use compared to your available credit. For example, if you have a credit card with a $10,000 limit and a balance of $5,000, your credit utilization rate is 50%. High credit utilization can signal to lenders that you are relying heavily on credit and may be at risk of defaulting on your debts.
Credit utilization accounts for about 30% of your FICO credit score. Generally, it is recommended that you keep your credit utilization below 30%. If you have a high credit utilization rate, it can negatively impact your credit score.
How to avoid this mistake?
- Keep track of your credit card balances and try to pay them off in full each month.
- Avoid opening too many new credit accounts at once.
- Consider asking for a credit limit increase, but be cautious of overspending.
3. Closing Credit Accounts
Closing a credit account can also negatively impact your credit score. When you close an account, you reduce your available credit, which can increase your credit utilization rate. Additionally, if the account you are closing has a long credit history, it can also lower the average age of your credit accounts.
How to avoid this mistake?
- Keep credit accounts open, especially those with a long credit history.
- Consider using credit accounts periodically to keep them active.
- If you have too many credit accounts, consider closing the ones with the highest fees or interest rates.
4. Applying for Too Many Credit Accounts
Applying for too many credit accounts at once can also negatively impact your credit score. When you apply for credit, the lender typically performs a hard inquiry on your credit report. Too many hard inquiries can signal to lenders that you are desperate for credit and maybe a high-risk borrower.
Hard inquiries can stay on your credit report for up to two years and can lower your credit score by a few points each time they occur.
How to Avoid This Mistake?
- Be selective when applying for credit and only apply for credit when you need it.
- Consider getting pre-approved for credit before applying to minimize the number of hard inquiries on your credit report.
- Avoid applying for multiple credit accounts at once.
5. Ignoring Errors on Your Credit Report
It is important to review your credit report regularly to ensure that all its information is accurate. Errors in your credit report can negatively impact your credit score and may even indicate identity theft. Some common errors on credit reports include:
- Incorrect personal information, such as your name, address, or social security number
- Accounts that do not belong to you
- Late payments that you did not make
- Incorrect account balances or credit limits
If you find an error on your credit report, it is important to dispute it with the credit reporting agency as soon as possible.
How to Avoid this Mistake?
- Review your credit report regularly and dispute any errors you find.
- Keep records of all your credit accounts, including account numbers, balances, and payment due dates.
- Monitor your credit report for signs of identity theft, such as accounts you did not open or inquiries you did not make.
The Role of Loan Agents in Credit Scores
Loan agents are financial professionals who can help you obtain a loan or credit. They may work for banks, credit unions, or other financial institutions. While loan agents do not directly impact your credit score, they can help you obtain credit that you can use to build or improve your credit score.
Loan Agents Can Help You
- Understand the requirements for obtaining credit
- Determine the type of credit that is best for your needs
- Improve your credit score by providing advice on how to manage your credit accounts
If you are considering applying for a loan or credit, it can be helpful to consult with a loan agent to ensure that you are making the best financial decisions for your situation.
Maintaining a good credit score is crucial for your financial health. By avoiding these five common mistakes, you can help ensure your credit score remains strong. Remember to review your credit report regularly and dispute any errors you find. And if you need help obtaining credit or managing your credit accounts, consider consulting with a loan agent or other financial professional.
