Credit scores and reports are a mystery to most people. They know credit is important and having a good credit score can get you approved for many things, including loans, mortgages, rental agreements, etc. The problem is not many people actually know factors into their credit and what mistakes they are making that might jeopardize their score. Here are the four most common mistakes that people make with their credit:
1. Not Paying Bills on Time
This is by far the biggest mistake people make when it comes to their credit. Most people don’t realize that even making one late payment can drag down their credit score. A credit card company has the right to report you to the credit bureaus if you are even a day late with a payment, although most wait at least 30 days to report late payments, if not more. If you are usually on time with your payments, some credit card companies will forgive one late payment, but you need to call and ask them to do so. Also remember that late payments on any bills — utilities, cable, mobile phone — can end up on your credit report if it is late enough and your account is sent to collections, so be diligent about paying your bills on time.
2. Not Having Enough Credit
Having less credit may seem like a smarter financial decision considering that having less credit means you will be less tempted to spend it. Sadly, having less credit can actually hurt your credit score. One of the main factors of your credit score is your credit utilization ratio, which compares your overall credit limit to how much credit us are using (or your overall balance.) For example, if you had $1,000 in credit and a balance of $200, you would have a credit utilization ratio of 20%. If you opened a new credit card and your overall credit limit rose to $2,000, your credit utilization ratio would go down to 10%. A lower credit utilization ratio can raise your credit score.
3. Not Diversifying Their Credit
Your credit report is generally made up of two kinds of credit: revolving and installment. Revolving credit is basically any credit that can be borrowed against over and over again, like a credit card. Installment credit is an agreed upon amount that you pay off in installments, like a loan. In order to have a healthy credit score, you need both kinds of credit. People that only use credit cards or that only take out loans generally have lower credit scores. Diversifying your credit shows the credit bureaus that you know how to handle more than one kind of debt. So if you only have credit cards now, try taking out a student loan, a mortgage or even just an equity loan on your house. It can help your credit score.
4. Not Checking Their Credit
This is one that over half of the country suffers from. People, in general, don’t know their credit score or what’s on their credit report, which can be devastating to their credit. Yes, knowing your credit score can help you make more informed financial decisions, but beyond the financial part, there are other areas that can affect your credit report. Lenders can make mistakes, and some of those mistakes can end up on your credit report, dragging down your credit score and causing you to pay more in interest rates for no reason. Always check your credit report for mistakes. You can fix the mistakes yourself by contacting a the credit bureaus, or you can have a credit repair service make the fixes for you.
Checking your credit report can also alert you to identity thieves. If your identity has been stolen and the thieves decide to open a credit card in your name, you’ll be alerted to it by searching for strange activity on your credit report. Most credit report monitoring services will actually monitor your credit reports for you, as well as your social security number, your personal information and will monitor the black market for your information to make sure you haven’t been a victim of identity theft.