Common credit mistakes that affect credit scores?

 After working in the credit card industry for a decade and now as a real estate investor for the four years I have gained firsthand experience of how crucial a credit score is. Even a slight fluctuation in your credit points can make a difference potentially leading to interest fees amounting to tens or even hundreds of thousands of dollars. Today I would like to take this opportunity to discuss the five mistakes that beginners often make which ultimately harm their credit scores. Along the way I will provide you with tips, on how you can avoid these pitfalls and take measures to improve your credit score.

So let's jump into it 

Mistake Number One: Only having one type of credit account 

In the realm of finance it often proves beneficial to follow an approach, rather than complicating matters unnecessarily. This principle is embodied by the acronym KISS, which stands for "Keep It Simple Stupid." Complexity in products frequently serves as a smokescreen, for quality. For example using life insurance as an investment can be quite unfavorable. However when it comes to credit cards we slightly deviate from this rule.

While simplicity may seem appealing in managing debt banks value individuals who can effectively handle types of debt. Demonstrating your ability to manage forms of debt indicates responsibility. Increases your creditworthiness. Consequently you are rewarded with a credit score.

To build a credit profile it's essential to have a mix of two types of accounts;

1. Revolving Credit Account; This resembles a credit card where the balance and monthly payments may vary.

2. Installment based Loans; Examples include student loans or auto loans where the payment amount remains fixed throughout the loan duration.

Maintaining this combination of accounts helps establish a credit history and by using types of bows and making payments, for each type you demonstrate to your potential creditors that you are a responsible individual capable of managing multiple credit accounts. This builds trust. Gives them confidence in your creditworthiness.

It's important to note that having a mix of credit accounts only contributes to 10% of your FCO credit score. So while its advisable to have at one account, in each category it's not necessary to go and open numerous accounts.

Mistake Number Two: Seeking too much credit

Every time you apply for a credit card or an auto loan it triggers an inquiry. This means that the credit bureaus send your credit report to the lender for assessment. In essence someone needs to review your creditworthiness before deciding whether to lend you money. However there is a situation where these lenders may raise concerns if they notice that your credit has been pulled frequently. They might assume that you are actively seeking credit from sources, which they perceive as behavior. Consequently this could have an impact, on your credit score—a bit of a Catch 22 situation. While seeking credit is important, for building your credit history asking for much from institutions can potentially harm you in the process. It's worth noting that hard inquiries only make up 10% of your FICO credit score and eventually drop off your report after two years.

Overall,

I'm not overly concerned, about this because although there will be an impact each time you apply for credit its not something that will have a severe negative effect. After two years it will no longer be a factor.

Here's a helpful tip; Make sure to go and freeze your credit report.

 

Basically no one can apply for credit without your permission. This often happens when you're, at car dealerships discussing financing. You provide them with your social security number. They proceed to check your credit times in order to secure the best rate for you. However it's important to understand that by going to Experian, TransUnion and Equifax you can easily put a freeze on your credit. It's completely free to do. This means that every time you want to apply for a credit card or an auto loan you have the control to give them permission than letting them access it freely. It's worth noting that putting a credit freeze on does not have any impact, on you; it can only bring benefits. Additionally if you've ever experienced identity theft or fraud before it's always wise to have your credit frozen as an added measure. This way nobody can fraudulently apply for credit in your name. Burden you with debt responsibility.

Mistake Number Three: Closing old credit cards 

This particular topic is quite straightforward. It does have an aspect that I'll explain in a later section. When it comes to your credit history banks and lenders prefer to see longevity. They want evidence of a track record of financial behavior. To assess this they consider two factors; the age of your credit card and the average duration each card has been open.

It's logical to conclude that you should definitely keep your oldest card open. However some people mistakenly believe that they should never close any cards because they think it will negatively impact their credit length. In the section I'll explain why it's actually acceptable to close cards, rather than your first one. Nevertheless bear in mind that you should make every effort not to close that card.

The length of your credit history only accounts for 15% of your FICO credit score. My advice is to keep your credit card account open. You can generally close any subsequent cards that you no longer use. Personally I've had, over 60 credit cards during my time, in this field. I don't have all 60 today. Despite that my credit score currently fluctuates between 780 and 820 which shows that it's possible to close cards you don't need anymore. Just make sure to preserve your card. Maybe the second one if the first one was a bad choice.

Mistake Number Four: Using too much of your credit

I have a yet important point to make. Even though a bank may offer you a credit limit of $5,000, $10,000 or even $20,000 it's not advisable to utilize the whole amount. If you max out your credit limit the bank might perceive you as a risky customer. This can negatively impact your credit score. Now there are reasons why borrowing 100% of your credit is considered risky. However the key takeaway is to ensure that your credit utilization remains below 20%. It's generally acceptable if it falls between 20% and 30% but exceeding 30% is strongly discouraged as it significantly affects your credit score. Keep in mind that your overall credit utilization contributes to 30% of your FICO credit score calculation—a factor to consider.

Sure I'd recommend keeping your credit utilization below 20% as a priority.

I have a couple of tips for you;

• The first tip is to time your payments, on the statement close date or the closing date. This can help keep your credit utilization low and potentially give you an advantage, in the system.
• The second aspect I want to highlight regarding utilization is the impact it has when you decide to close your credit accounts.

Okay lets say you have two credit cards. Each card has a credit limit of $5,000. Together you have a credit limit of $10,000. Now imagine you buy a camera lens for $3,000. In this scenario you would be utilizing 30% of your credit across both cards. It's not perfect but not too problematic either.

However if you were to close one of those cards and then make the purchase, with the remaining card you would end up using $3,000 out of your credit limit of $5,000. This means that your credit utilization would increase to 60%. That is why closing credit accounts can have consequences.

Another thing worth noting is that if you close a credit account in standing—meaning it has been fully paid off—it will still have an impact on your credit history for, up to 10 years. So I don't mind closing accounts that are fully paid off and in standing. However I do make sure to keep my credit utilization below 20% to 30%.

Read: Understanding How Credit Card Delinquency Works

Mistake Number Five: Missing payments

It's really important to ensure that you pay your credit card bills on time. However there are a things to consider. The top priority, for banks is your track record of making payments. All would you lend money to someone who doesn't pay it back on time? Not. Banks feel the same way. On time payments make up 35% of your credit score. But don't worry much if you miss a payment by a day; it's not the end of the world. You actually have some leeway, around 30 days. When you're 30 days late in making a payment that specific credit card or bank will report it to all the credit bureaus, which will negatively impact your credit report. However, between zero and 30 days late it's not ideal but not catastrophic either. Just make sure to make that payment on time and try asking for the fee to be waived.

However if you exceed the 30 day grace period, for your credit card payment you will find yourself in a situation. It is crucial to never miss a payment deadline.

If you don't have money to pay for something away it's best not to put it on your credit card. It's not an idea to think that making minimum payments or missing a payment here and there is okay. A credit card is simply a tool that helps you earn points get purchase protection and enjoy travel benefits.. Remember, its just linking your checking account to the item or service you're purchasing. It's not some card that gives you money to spend. It's still your own money being used so make sure you pay on time. Personally I find it smart to set up automated payments every month so I don't have to worry about missing any payments. That way everything gets taken care of from my checking account without any hassle.

Conclusion

That wraps up the five mistakes I often see beginners make, which can negatively impact their credit score. As we go through these mistakes they become more and more costly. However the two important ones are ensuring payments as it accounts for 35% of your score and maintaining a low utilization rate, which accounts for 30% of your score. When combined these two factors make up 65% of your credit score. So it's crucial to prioritize making payments on time and paying them in full. As always feel free to leave any comments, questions or suggestions below in the comments section.