Top Four Credit Mistakes Americans Make

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Feel like you are doing everything right when it comes to credit, but still your credit score is not as high as it should be?  Not sure what to do?  Here are the most common mistakes people unwittingly make - some obvious, some less so:

Being Close to the Limit

You may be surprised to learn that it’s not necessarily the amount you owe on your credit cards that matters, but what percentage of available credit you are using.  The closer you are to your available limit, the riskier you look to potential creditors, and thus the lower your credit score.  For example, the person who is using 90% of available credit will have a much lower score than the person who is using 20% (all things being equal).  The solution to the problem?  Ideally, pay down credit cards to the absolute minimum and then keep your balances low.  And if you pay off some cards completely, don’t close them down.  Why?  Because the next biggest credit mistake is:

Canceling Credit Cards

Closing down unused credit card accounts only sounds like a good idea.  But the problem is that it increases the percentage of available credit that you are using.  Confused?  Let me explain…  Remember what we just discussed about being too close to the limit?  Let’s say you have two credit cards with $1,000 limit on each (and therefore your total available limit is $2,000).  On one of them the balance is $0, and on the other one the balance is $1,000.  This means that you’ve used 50% of your available limit ($1,000 out of the available $2,000).  Now let’s suppose you cancel the card where your balance is $0.  By doing this you are also losing the $1,000 limit from that card.  Now all you have left is a credit card with $1,000 limit and $1,000 balance on it – in other words you are completely maxed out!  This will be immediately reflected in your score – in a negative way.  So keep both cards, even if you don’t plan on using them any more.  Buy something with them every once in a while (so they don’t get cancelled by the issuing bank due to non-use), but pay off the balances each month.

Sloppy Payment History

Otherwise known as “not paying bills on time,” sloppy payment history will make the biggest impact on your credit score.  Even one or two late payments can mess up an otherwise good credit.  It’s not fair, I know, everyone can forget or make a mistake every once in a while.  But credit bureaus don’t care, and every late payment counts.  To avoid this, consider using an online bill pay service.  Most banks now offer it for free.  Otherwise, using a checklist of your recurring bills (with payment amounts and due dates written down) helps too.

Needlessly Applying for Credit

You know all those credit card offers you get in the mail?  Toss them in the garbage (after you shred them, of course, to protect your identity) from dumpster-divers).  Applying for new cards that you don’t need only hurts your credit score.  How so?  Every time you apply for credit, an inquiry is made (and noted) in your credit report.  To a lender, having too many inquiries means that you may be experiencing financial difficulties and that’s why you are shopping for credit.

Another trap to try to avoid are “special” credit offers from stores.  With the holiday season just around the corner, you will likely hear more and more offers to “save 15% on your purchase today if you apply for our store card.”  This may sound enticing, but each application counts as an inquiry, and your score goes down.  And what does a lower credit score mean?  It means that you will be paying a higher interest rate on important things like a mortgage or car loans.  Is saving 15% on a $100 purchase at a department store worth it?

So there you go - the four most common mistakes people make when it comes to credit.  Avoid making them and you will enjoy lower interest rates and a higher credit score.