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Your credit score is one of many important indicators of your financial health, so it's crucial to develop good credit habits to build and maintain a good credit history.
As critical as that is, though, it's equally important to learn and avoid common credit mistakes that can stifle your progress and even damage your credit score for years to come. As you learn about the different factors that affect your credit score and the ways you can stumble, you'll have a better chance of achieving your credit goals.
Not Checking Your Credit Often
Monitoring your credit score is a good way to not only keep track of your progress but also to spot potential issues and address them before they do significant damage.
You can check your credit report and score as often as you'd like. Generally, you can access each of your three credit reports for free once every 12 months through AnnualCreditReport.com. However, through April 2021, you can access all of your credit reports weekly. You can also get a free Experian credit report anytime.
Many sources, including Experian, also provide free access to your credit scores and update them regularly. You can obtain your free FICO® Score☉ with credit monitoring through Experian.
There are several other ways you can check your credit score. For example, some banks and lenders offer access to their customers as a perk. You may also get one when you work with a credit counselor. Just make sure the credit scores you see are the same as the ones lenders are likely to use.
As you review your credit health, look for items in your credit report that have the potential to hurt your credit score or are already doing damage, so you can address them quickly.
Not Paying Bills on Time
Your payment history has a big impact on your credit scores, so missing even one payment could wreak havoc on your credit.
The good news is that late payments on loans and credit cards are reported only if you're late by 30 days or more. So while being just one day late may result in fees and penalties, it won't damage your credit if you get current on your account before the 30-day mark.
If you do get slapped with a late payment on your credit report, it'll remain on your report for seven years. While its impact on your score may diminish over time with new positive information, it can still hamper your credit growth the entire time it's on there.
To ensure you pay all your bills on time, request payment reminders from your lenders or, even better, set up autopay through your lender or bank account. Just make sure you have enough money in your bank account each month to cover your bills.
Only Making Minimum Payments on Your Credit Card
Paying just the minimum amount due on your credit cards that carry interest will cost you more money in the long term than paying all, or most of, your debt every month. And if you're not careful, it can also damage your credit.
That's because as you make just the minimum payment every month, you may end up carrying a high balance on your credit card. This increases your credit utilization ratio, which is the percentage of your available credit you're using at a given time. How much you owe is another important factor in your credit scores, so a high utilization rate could cause significant damage if left unchecked. A credit utilization ratio above 30% can start to drag down your scores, but the lower it is, the better.
Paying down your balances so they're all under 30% utilization is a good start. But if you have a significant amount of debt, consider attacking it with the avalanche method or snowball approach to pay down your cards' balances.
Applying for Multiple Credit Cards at Once
Virtually every time you apply for credit, the lender runs a hard inquiry to check your credit report. This helps them determine whether to approve your application. When you're seeking certain types of loans, such as mortgage and auto loans, having multiple inquiries in a short period typically won't do much harm because they're all counted as one inquiry when calculating your credit score.
That's not how it works with credit cards, though. When you apply for multiple credit cards in a short period, typically each inquiry will count against you. In general, one additional hard inquiry may knock a few points, if any, off your credit score. But multiple inquiries can have a compounding effect on your credit score and cause creditors to view you as a riskier borrower.
To avoid damage to your credit, research credit cards and your likelihood of being approved before completing an application—then apply for the one you think is a fit. Experian CreditMatch™ can help you with providing you with credit cards according to your credit profile.
Taking on Unnecessary Credit
Let's say you take out student loans and use the money for other purposes, get a personal loan to pay for a vacation or rack up a credit card balance with discretionary purchases. These actions could put a strain on your budget, making it more challenging to keep up with your monthly payments and more likely that you'll miss a payment. It'll also increase how much you owe, which could also have a negative impact on your credit score—especially if it's on a credit card.
The simple solution is to only apply for credit when you really need it. This way you'll avoid paying interest charges unnecessarily and stretching yourself too thin financially.
Closing Credit Card Accounts
When you close a credit card account in good standing (meaning you've never missed a payment), its history can remain on your credit reports for up to 10 years. However, the action could wind up hurting your credit score, at least temporarily. That's because when you close a credit card, you lose its available credit, which could cause your total credit utilization rate to go up.
Also, your credit score will no longer benefit from on-time payments over time, which won't necessarily hurt your credit score, but it could impede its growth.
That said, if you don't have balances on your other credit cards, closing your card after paying it off may not be a major issue. It may also be worth risking a hit to your credit if you've struggled with overspending and don't want the temptation, or if the card has an annual fee and you won't get enough value from the account to make up for it.
Opting for Longer Auto Loan Terms
Auto loan terms are at all-time highs—the average financing term for new cars is just under 72 months and about 65 months for used cars.
Opting for a longer repayment term on your auto loan may seem like a good idea because it lowers your monthly payment. Some lenders will go as long as 84 months, which could make the car you've always wanted more affordable.
But if you can, it's best to avoid longer-term auto loans for a few reasons:
- You'll ultimately pay more in interest, even if you're paying less each month, which drives up the total cost of the vehicle.
- With a lower monthly payment, your car could end up depreciating faster than you can pay off the debt, which means you'll owe more than it's worth.
- Your financial situation could change over the next six or seven years and make it difficult to keep up with payments.
If you're having trouble with the higher monthly payment that comes with a shorter-term loan, look for ways to reduce how much you borrow. Options include putting down more money, removing add-ons like a maintenance package or service contract, and buying a less expensive vehicle.
Building Credit Is a Long Game
It can take years to get your credit score to where you want it to be. While that may sound daunting, it helps to take steps such as checking your credit report and score regularly, paying your bills on time, keeping your credit card balances low and avoiding debt that could put a strain on your budget.
The more quickly you develop these habits and avoid credit missteps, the easier it will be to continue those behaviors over time. As you build and maintain your credit history, you'll see many benefits, including cheaper financing, lower auto and homeowners insurance rates and more.