3 Common Mistakes that Lower Credit Scores

3 Common Mistakes that Lower Credit Scores

Whether you know it or not, there might be things you are doing that can effect your credit score for the worse.   Even if you aren’t buying a home anytime soon, you don’t want to be surprised by your credit score when you want to buy a car or refinance, for example.

The decisions you make can hurt or help your score, and that’s why it’s better to have an understanding of what can impact your credit score. Even decisions or actions you think will help your score can actually hurt it!

Sound confusing? You’re not alone since many borrowers don’t know the difference between fact and fiction when it comes to building a good credit score.

Let’s clear it up for you so you can avoid making these mistakes below:

Mistake 1: Paying late didn’t hurt my credit since I’m caught up now.

It’s important to pay all of your bills on time, every time! Doesn’t matter if you’ve caught up … you were late and your account knows that.

If you must pay late and want to avoid damage to your score, pay the accounts that report to credit bureaus first. You can find this information by getting a copy of your credit report.

Creditors report to each credit bureau once a month, and a late payment will show on your credit report once you are 30 days late on the payment. Most creditors will report to the credit bureaus on the day of the month that your statement posts, so this could be a different day of the month if you have multiple lines of credit.

Even if you can only make the minimum payments for that month, it is still much better than skipping it all together.

Mistake 2: Dollar amounts matter in credit scores.

It may sound crazy but dollar amounts don’t matter in FICO scoring. The effect on your score is the same for a $1 late payment as a $1,000 late payment.

Keep in mind that the fewer late payments on your credit report, the higher your score—regardless of their dollar amounts.

Another way to increase your score is to have a high credit limit but low balance. Balances below 30% of the credit limit is good and below 10% is better.

Tip: You can call your credit card companies to see if they will increase your credit limit. This helps with your credit usage. For example, your FICO score will benefit more if you have a $500 balance on a $5,000 credit limit versus a $500 balance on an $1,000 limit. The same balance went from 50% usage to 10% usage just by increasing your credit limit. (Just be careful not to increase the usage on your card with an increased limit!)

Mistake 3: Closing credit card accounts helps your score.

Don’t do this!! If you cancel a card, you may have just thrown away your chance to increase your score by continuing to build on years of positive credit.

The length of time your line of credit has been open is a factor in determining your credit score. The longer you keep your cards open and active, the more you will be able to build your credit. Even if you don’t “need” the credit card anymore, you can designate it for one small purchase each month to keep showing a history of on time payments and low usage.

For example, if you just used one credit card for gas or groceries each month. It’s better to keep your cards open and active, using them for small purchases. You can also do this to help build up your score if it isn’t high enough.

Avoid these mistakes and keep your credit score high.  If you have any questions, feel free to email me at jeng@firsthome.com anytime!