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5 Ways You Are Ruining Your Credit Score
What factors affect your credit score?
Do you ever feel like you’re in a never-ending battle with trying to improve your credit score?
Are you looking at your credit score scratching your head wondering why it isn’t getting any higher?
Your credit score influences a lot of things in your life.
Many employers will look at a credit score before hiring a new employee. Banks will use your credit score to determine whether you can get a loan and what interest rate you will get if you do get one.
Even insurance companies often look at your credit score in underwriting your insurance policy. What does this mean? It means that your credit score is something you need to be watching and building all the time.
First, What’s My Credit Score?
If you don’t know what your credit score is, then you need to check it! There are a couple of places where you can find out your credit score for free.
You can find out your FICO credit score for free (no credit card required) from Discover Card (you don’t need to have a Discover card to do this).
You can also use Credit Karma to get a free score and also free credit monitoring. Keep in mind that Credit Karma doesn’t pull from all three credit reporting agencies so the score is not super accurate like Discover but I still use them for the free credit monitoring and their easy to use app.
So now that you know your score, is there room for improvement? Avoid these 5 mistakes and start building your credit score!
What Affects My Credit Score?
1. Carrying High Balances
A large portion of your credit score is determined by what percentage of your available credit you’re utilizing. If you have a total limit of $20,000 across all your credit cards and you’re carrying balances that total $15,000, then you’re using 75% of your credit.
The lower the percentage, the better. Though no one knows for certain, most experts believe the magic number is 30%. If you’re utilizing more than 30% of your available credit, your score is lower because of it.
2. Paying Late
The largest portion of your credit score is determined by how well you pay your bills on time. Credit bureaus typically aren’t notified until you’re at least 30 days late. After that point, your credit takes a hit. The penalty to your score is even greater if you’re 60, 90, or 90+ days late.
Paying your bills on time and paying more than the minimum will raise your score for both timeliness and total credit utilization. If you can pay off the balance in full that will be even better.
3. Not Checking Your Credit Reports
Most credit reports have errors and these mistakes might not be in your favor. You should be pulling a copy of your credit report annually! You can get all 3 (one from each of the three credit reporting bureaus) for free once a year from annualcreditreport.com. Go through your credit report and look for any incorrect information and follow the dispute process to make things right.
4. Canceling Your Credit Cards
Some experts tell you to cut up your credit cards and throw them away. Doing that is fine; just don’t close the accounts. Doing so will lower your debt to credit ratio, resulting in high credit utilization.
For example:
Imagine that you have $30,000 of total credit available to you (3 cards x $10,000 each). If two cards have a zero balance and the other has a $6,000 balance, you’re using 20% of your credit. That is good for your credit score.
If you decide to cancel the two cards that you hardly use with the zero balances, now you’re utilizing 60% of your available credit ($10,000 available and you are using $6,000 of it). Ouch. The ideal situation is to have a lot of credit available to you, but carry as low a balance as possible. This shows that you can handle credit wisely.
5. Having Limited Credit
Many people think they are doing well by only having one credit card and not carrying a balance. However, your credit score will be higher if you have some varied forms of credit on your report. You can see this is the example I gave in my post on how to get a perfect credit score.
A credit card or two, a store card, and a car loan would be much better. In this example, the car loan doesn’t have to be still open; just having a car loan in the past is fine. Be sure your credit history has some variety concerning the forms of credit you’ve used.
This doesn’t mean you should go out and buy a car just to improve credit but variety is good.
Having a high credit score makes life a lot easier. It’s easier to get credit when you need it, and that credit is much cheaper, too. The interest rates you pay on loans and credit cards are widely a function of your credit score.
Get that score as high as you can, and you’ll save a load of money over your lifetime. Even a 1% difference in an interest rate could cost you thousands on a mortgage or other loan.
Fix Your Credit Action Steps:
- Get your free credit score from either Discovercard.com/free-credit-score or Credit Karma
- Pull your credit reports each year from annualcreditreport.com to look for errors and possible fraud.
How’s your credit score? Are you making any of these five mistakes? What are your thoughts or questions, comment on this post!
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