Achieving a credit score you can be proud of is a big accomplishment. But it’s important to remember that good credit is a journey, not a destination. You have to keep making the right money moves to hold onto that score you’ve worked so hard to attain.
Here are three common mistakes that could cause your good credit to unravel fast – be sure to avoid them if you want to keep your score on the straight and narrow!
1. Paying a non-credit bill late
Most people know that paying their bills on time is the key to achieving good credit. After all, payment history makes up 35% of your FICO score, so it’s smart to focus on getting those bills in by their due dates.
Yet, many people mistakenly believe that only credit-related bills (like loans) will affect their scores. This sometimes leads them to be careless about paying non-credit bills (like rent or utilities) on time.
But this is a really bad idea. It’s true that most utility companies and landlords don’t report your payments to the three major credit bureaus on a monthly basis. However, if you get behind on one of these bills, your account could get turned over to a collection agency. This will likely result in a black mark on your credit report that could stick around for as long as seven years.
The takeaway? Pay all your monthly bills on time, no matter what.
2. Applying for too much credit at once
If you’ve struggled to get approved for credit in the past because of a low score, you might think that now is the perfect time to apply for a few new cards. But not so fast – 10% of your credit score is determined by new credit inquires. The FICO model interprets several card applications in a short period of time as a sign of financial instability and, therefore, credit risk. Your score could take a hit as a result.
It’s tough to say exactly how much space you should put between credit card applications to avoid doing damage to your score – this really depends on your individual credit profile. For most people, getting a new card every six months or so is usually safe.
And be sure you’re only applying for credit you actually need. Getting every hot card that hits the market isn’t a good long-term strategy.
3. Not paying attention to your credit utilization
Many people think that as long as they’re paying their credit card bills on time and in full, they have nothing to worry about when it comes to their credit score. While it’s true that these are two important steps to good credit, there’s something else to keep in mind: your credit utilization ratio.
This number is calculated by dividing the amount you owe on your card(s) by the total amount of credit you have available. So, if you have a credit card with a limit of $5,000 and your current balance is $2,000, your credit utilization ratio is 40%.
It’s important to keep your credit utilization ratio below 30% at all times, because the 30% of your credit score determined by amounts owed is heavily influenced by this number. Even if you end up with a $0 balance on your card at the end of every month, your issuer might report what you owe on your account before you make a payment. This could end up hurting your score, even though you’re not carrying a balance from month to month.
Your best bet is to monitor your balance carefully throughout the month, and make a payment if you start creeping above the 30% utilization mark on any of your cards. This one little trick will go far in keeping your score intact, so be sure to keep it in mind.
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