When people discuss common credit mistakes, they often focus on credit card mistakes only. While credit cards are a major factor in your credit score, there are other areas that affect your credit and include mistakes you should never make, if at all avoidable. To better help our credit union members and community take control over their individual credit scores and financial situations, we've assembled the following list of 5 credit mistakes you should never make.
Read below to find out what these mistakes are and learn how you can avoid these common pitfalls.
Mistake #1: Thinking Only Credit Cards are Affected
As we mentioned, your credit card can't be the only focus when improving your credit. Your credit score is based on more than your credit card balances. It also includes paying your other bills on time, which can include rent, utilities, other large purchases paid over time, and debt in other areas of your budget. It's important to consider credit as a long-term journey. Your overall credit consists of a big picture encompassing many areas of your financial life. In fact, your credit score can be divided into the following sections:
- Payment history: this accounts for around 35% of your credit score
- Debt and credit utilization ratio: this makes up more than 30% of your credit score.
- Credit history: even how long you've had credit makes a difference, around 15% of your credit score.
- Credit mix: the different types of credit accounts, from student debt to car loans, and mortgages make up around 10% of your credit score.
- New credit: How many credit accounts you've opened and hard inquiries made by lenders makes up around 10% of your credit score.
As this breakdown illustrates, managing your credit is more than simply managing a single credit card account.
Mistake #2: Don't Avoid Checking Credit
Another common mistake people make is not checking their credit score or not regularly monitoring it. It can be disheartening to check your score if it's not where you want it to be and you are working towards better credit, but the score is also an excellent way to track your progress, as well as see if any errors have been made by the credit companies. Some people think checking your credit score often can hurt it, like a hard inquiry which is often made when signing up for a new account, but this is a myth. There are many banking institutions and credit companies that let you monitor your score for free with soft pulls only.
Don't be fearful of checking your credit score, especially if working towards a better one. It tracks your accomplishments and gives you markers to celebrate. What gets mesured gets improved!
Mistake #3: Not Making Payments on Time
Your payment history has a large impact on your credit and is one of the easiest mistakes you don't want to make. The good news is that there is a grace period before it hits your credit score, 30 days or more. This isn't to say you may not be charged late fees or penalties, but your credit score won't be impacted.
If you do get a late payment on your credit report, it'll stay there for seven years and will hamper your credit growth during its stay.
Mistake #4: Applying For Multiple Cards
Another thing to avoid is applying for multiple credit cards at once as each lender will run a hard inquiry to check your credit report. This is also true when applying for loans, but the difference is that with loans is the multiple hard inquiries run in a short time period will be counted as one inquiry on your credit score. For example, if you're applying for a new auto loan it's okay to apply to several banks and credit unions in the same day to find out which institution will give you the best rate and terms for the loan. As long as all of those as completed in the same day they should count as a single inquiry.
This is different with credit cards. When applying for multiple credit cards in a short period, each inquiry will count against it. One hard inquiry can knock a few points off, but multiple ones will have a major effect on your credit score and lead creditors to consider you a riskier borrower.
The best way to avoid this is to take your time and research credit cards, as well as your likelihood of approval, before submitting an application and to space out your applications to new cards by at least 6 months or more.
Mistake #5: Make the Minimum Payments
Times can be tough and sometimes the minimum payments are all you can make, but then the interest will cost you in the long term which can also damage your credit. This is because as you make the minimum payment every month, you'll end up with a higher balance on your credit card, which increases your credit utilization ratio. As you might recall, a credit utilization ratio above 30% can begin to drag down your scores. You want a low ratio, preferably below 30% with below 10% being ideal.
A better way to attack credit card debt, or any high interest debt, is either the avalanche method or the snowball approach. (Follow us on social media for more information on these and other budgeting methods.)
We at Canopy Credit Union work to educate our Spokane neighbors and do our best to keep you on a great credit path. We encourage you to reach out to us with any questions or concerns and speak with one of our associates!