You could be damaging your credit score without even being aware of it. That’s because many financial steps that seem benign are actually costly credit score killers.
This is important no matter how solid your financial situation is. Even slight blemishes can result in higher credit costs and worse. Employers, potential business partners and landlords also review credit scores before deciding to do business with you. I’ve even heard of couples checking each other’s credit score before deciding to tie the knot. Extreme – but smart.
With so much at stake, let’s look at the top 7 ways people torpedo their credit score – again, without even realizing it:
1. Closing Old Accounts
If you want to maintain the highest possible credit score, your first step is to never close an old account – especially if it’s in good standing. Here’s why. If you have good history associated with that account, it will drop off your history 10 years after you close it. That’s like volunteering to lower your own credit score.
On top of that, FICO loves people with long credit history because they longer the history the lower the risk. They figure it’s easier to spot a credit flake if they have a long history to inspect. That’s why 15% of your score is associated with the length of credit history.
Neal’s Notes: If you are struggling with a scuffed up credit history, here’s a free course I put together that just might help turn it around. I put this together especially for those who want to increase their credit score to buy a home but it can be useful to you regardless.
2. Carrying Higher “Utilization” Than You Have To
30% of your score is based on how much credit you use compared to how much credit you have available. So to get the most points possible, you want the highest credit limits possible but keep the lowest possible balance.
You can manage your utilization in two ways. As the first point suggests, keep old cards open – especially if they have no balance due on them. This increases available credit and makes your overall utilization low.
Next, pay off as much debt as you can. I meet people all the time who carry credit card balances yet have more than enough to pay it off. Often, that money is sitting in savings accounts earning nothing.
If that describes you, and you don’t need the money for emergency funds, take that money and pay off your credit card debt ASAP Pilgrim. It will save you interest expense and slash your credit utilization. Double Prizes.
3. Getting Retail Store Credit Cards
I know that whenever you go to the store, the clerk offers you a 10% discount if you apply for a store credit card but think carefully about this move before signing up. Every time you do this the store inspects your credit history which is known as a “credit inquiry”. The thing is, when others make inquiries into your credit history, it goes on your record. And that could hurt you if you have too many inquiries over the last 12 months.
(Keep in mind that an inquiry is tallied against you whenever anyone looks into your credit. That includes would-be employers, life insurance companies, landlords etc. If you review your own credit or if a company looks at your history before they send you a credit offer, it’s called a soft inquiry and it doesn’t hurt your score. But be mindful and don’t let other sniff around your history unless it’s absolutely vital.)
4. Wasting Time On The Wrong Credit Score
If someone needs to review your credit score, chances are very high that they’re going to review your FICO score. That’s the score generated by Fair Isaacs company and it’s the score used by over 90% of the financial institutions in the United States and (often) world-wide. So don’t waste your time on other scores.
That’s not to say that each company requires the same FICO score in order to do business with you. Some lenders will demand that you have a higher FICO score than others. But almost all of them look to FICO and that’s the score you want to review.
5. Not Obtaining All Three Credit Reports At the Same Time.
Even though you really should focus on one credit score, you need to keep tabs on all three of your credit reports. Many companies compile and sell your credit information to financial institutions but there are 3 national credit bureaus you need to concern yourself with. They are Equifax, TransUnion and Experian. These are the companies that compile the data upon which your credit score is based.
The reason you need to follow all three reports is that many creditors only report to one or two of these bureaus. That means if there are mistakes on one report, it could damage your credit score without you even knowing about it unless you check them all. And since there is no way of knowing where mistakes might be hiding, it’s important to check all three of your reports and clean up all the errors you can find.
6. Being Credit Lazy
I just mentioned how important it is to review all three of your credit reports. Once you do that, it’s important to take the next step and actually clean up the mistakes.
Of course there are blatant errors that are easy to fix such as finding accounts listed on your report that don’t belong to you. But there are other errors you can and should correct that may be less obvious.
For example, did you know that even if negative credit information is technically correct, you can get it removed from your report if it isn’t verifiable or complete?
Unfortunately many people are complacent when it comes to dealing with credit agencies and just take what these companies dish out. You have rights and it’s not difficult to enforce them. Take the time to understand your rights and make sure the creditors and credit bureaus respect them.
7. Dealing With Companies That Don’t Report To The Agencies
If you do business with a credit card company that doesn’t report to the bureaus, you are in a lose-lose situation friend. Here’s why.
If you pay your debt on time, you won’t get any good points for it. And if you don’t pay and the account goes to collection, you will get stung. The card may not report you but the collection company will. And having collections written up in your file is the worst data you can have (other than criminal convictions).
Even if you play by the rules, you might be damaging your credit score. Keep these seven mistakes in mind. Bookmark this page and review it once a year to make sure you are maintaining the highest possible credit score. These are easy mistakes to make but they are just as easy to avoid.
What other unobvious mistakes have you made that hurt your credit score?
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