As a human being, we all make mistakes. But, some mistakes we can easily rectify. For example, forgetting about an essential commodity while shopping may take your extra time and can cost you a little more. But, if you somehow wrongly handle your credit, it may cost you thousands of dollars. If your credit score is bad, not only you’ll suffer a big monetary loss, but also you can’t be approved for a mortgage or other line of credit with best rates.
We all make mistakes, but if we want to improve our credibility, we must avoid some major credit mistakes for building a better financial future.
1. Missing your debt payment
Do you want to damage your credit score? You can do it easily by making a late payment or simply by not making payment at all. Since all of your future lenders can see your payment history traces through your credit score, you must be regular on your monthly debt payments and it must be done within due date. Making on-time payment is considered as an important factor to raise your credit score. Just one missed payment can ruin all the hard work and eventually drop your score to some extent.
So, what can be a possible solution? Things you can do is to initiate an automated payment structure if possible or transfer an approx bill amount per month (gross) in your checking account. You can also set up calendar reminders for your due dates and pay your outstanding bills on time each month. As a result, you’ll be able to know about your important payments dates and also that you have enough money to pay everything off.
2. Using maximum credit limit
Using your available credit to its maximum is not only harmful to your bank account, but the lenders also become curious about your spending behavior. It is because they believe consumers who spend their available credit to the maximum limit are much more likely to default on their payments.
You need to keep an eye on your credit utilization ratio (divide your credit balances by your credit limits) and take required step to control it. It is good to maintain your credit utilization ratio less than 3:10 if possible. You can make multiple payments in a month, or ask your credit card company to increase your credit limit, or just increase your cash usage – these methods can help you a lot to lower your credit utilization ratio.
3. Opting for too much new credit lines
Applying for too many credit lines have a bad effect on your credit score in different ways. Every time you send an application for a new credit line, the lender will pull your credit report, and it’ll be included in your report as one hard inquiry. One or two hard inquiries may have very little effect, but multiple inquiries can surely raise a red flag for your future creditors and lenders. On the other hand, the more you open new credit lines, the more you’ll access to your available credit. It will lure you to spend more money than saving.
So, you must control yourself and limit the applications. Hard inquiries will fall off from your account within 2 years, so you may wait for that time. However, you can also ask your creditors to increase your credit limit. If you’re satisfied with your current credit limit, don’t take out any new credit card.
4. Not using your cards at all
Creditors want responsible consumers who can use credit well and pay responsibly. However, it’s not possible for you to prove yourself responsible without using credit cards or any other line of credit. In addition, if you don’t use your credit cards, the creditors may close your account, and that’ll surely damage your score.
The best way you can use your credit cards is by making small purchases. Small credit card bills are easy to pay off, and it’ll also help you to retain your credit account. Also, it’ll help you to build up a good payment history for your future creditors.
5. Chasing rates
Transferring balances to a low-interest balance transfer card is a good option for borrowers to save money and pay down debt. However, as we discussed earlier, applying for new credit cards can include hard inquiries on your credit report. Various fees and charges may also add to increase your debt burden. Instead, do some market survey and stop too much balance transfers.
It’ll take several years to recover from your credit mistakes and rebuild a good credit report. However, by choosing the right path and avoiding above mentioned mistakes, you may keep your credit in a perfect and healthy condition.