A good credit score can unlock opportunities, from getting a mortgage with a low-interest rate to securing better insurance premiums. However, many people unknowingly make mistakes that damage their credit score, potentially costing them thousands of dollars over time. The good news? With the right knowledge and actions, you can fix your credit and avoid common pitfalls. Let’s break down these mistakes and explore how you can turn things around.
1. Ignoring Your Credit Report
One of the biggest mistakes people make is not regularly checking their credit report. You’d be surprised at how many people don’t know what’s on their report until they’re applying for a loan or credit card. By then, it’s often too late to make quick fixes.
Checking your credit report at least once a year is essential. Free reports are available annually from the three major credit bureaus: Equifax, Experian, and TransUnion. Regular checks allow you to spot any errors or fraudulent activity before they negatively impact your score. In fact, about one in five people find errors on their reports that can drag down their scores. If you find an error, dispute it immediately.
Action Steps:
- Visit AnnualCreditReport.com to request your free credit report.
- Review each section carefully, checking for unfamiliar accounts, late payments, or inaccuracies.
- Dispute any incorrect information directly with the credit bureaus.
2. Missing Payments or Paying Late
Late payments are one of the most damaging factors to your credit score. Even one late payment can drop your score significantly. Payment history makes up about 35% of your FICO score calculation, so staying on top of payments is crucial.
Most people don’t realize that late payments are reported after just 30 days, and the longer the delay, the worse the damage. Missing a payment can also result in late fees and increased interest rates, further compounding the problem.
How to Fix It:
To avoid late payments, set up automatic payments or reminders. This way, even if you forget, your bills will be paid on time. Also, consider using credit cards for regular expenses and paying them off each month. This can help build your credit while preventing late fees.
Action Steps:
- Set up automatic payments for bills or use apps like Mint or Truebill to track due dates.
- Contact creditors if you’ve missed a payment, especially if it was a one-time occurrence. They may offer a goodwill adjustment.
- If you have multiple missed payments, create a payment plan and prioritize paying off outstanding debt.
3. Carrying High Balances on Credit Cards
Carrying a high balance on your credit cards relative to your credit limit is known as high credit utilization. This is another significant mistake many people make. It can harm your credit score by making you look financially overextended.
Credit utilization accounts for about 30% of your FICO score. The goal is to keep your balance below 30% of your credit limit. For example, if your credit limit is $1,000, try to keep your balance under $300. If you consistently carry high balances, your score will likely reflect this.
How to Fix It:
Paying down your credit card balances as quickly as possible is the best way to lower your utilization ratio. Additionally, ask for a credit limit increase if possible—this can lower your credit utilization ratio without requiring you to pay down as much debt.
Action Steps:
- Pay off existing balances as quickly as possible.
- Avoid making large purchases on credit cards if you’re already carrying a balance.
- Call your credit card issuers and request a credit limit increase.
4. Closing Old Accounts
It’s tempting to close old credit accounts once you’ve paid them off, but this can hurt your credit score. Credit history length makes up about 15% of your FICO score, and older accounts can positively impact this aspect.
When you close an old account, you reduce your credit history length, and your credit utilization ratio might increase (if you have fewer cards or lower limits). This can cause a dip in your credit score.
How to Fix It:
Instead of closing old accounts, simply leave them open and use them sparingly to maintain a healthy credit history. You don’t have to use the card regularly—just make sure it’s not dormant for too long. Also, check for annual fees and avoid cards that charge them if you don’t need them.
Action Steps:
- Keep old credit accounts open, especially if they don’t have annual fees.
- If you do close a card, ensure you don’t have high balances on your other cards.
- Regularly review your accounts to ensure they’re in good standing.
5. Applying for Too Much Credit at Once
When you apply for multiple credit cards or loans in a short period, it triggers several hard inquiries on your credit report. Each inquiry can cause a small drop in your credit score, and too many inquiries in a short time can hurt your score significantly.
Hard inquiries generally stay on your report for two years, but the impact on your score fades after about six months. However, if you’re applying for credit frequently, your score could be negatively affected in the long term.
How to Fix It:
If you’re shopping for credit cards or loans, try to do all of your applications within a short window (typically 30 days). This is because FICO treats multiple inquiries for the same type of loan in a short period as a single inquiry. Additionally, consider prequalifying for credit cards or loans before formally applying to reduce unnecessary hard pulls.
Action Steps:
- Avoid applying for multiple credit cards or loans at once.
- If you need to apply for credit, try to do so within a short window.
- Prequalify for credit cards and loans to gauge your chances of approval before applying.
6. Ignoring Your Credit Score
Many people don’t pay attention to their credit score until they need to apply for a major loan or mortgage. But by the time you realize your score isn’t where you want it to be, it may be too late to take quick action.
Monitoring your credit score regularly can help you spot issues early and address them before they become a bigger problem. There are several tools available to get a free credit score, such as Credit Karma, which tracks your score and provides tips on how to improve it.
How to Fix It:
Start tracking your credit score regularly. This gives you a sense of where you stand and helps you identify any dips or negative changes. Take action immediately if you notice a significant drop.
Action Steps:
- Use free credit monitoring tools like Credit Karma or Experian to track your credit score.
- Check your score before applying for new credit or loans.
- Understand the factors affecting your score and work on improving them.
7. Not Using Credit Responsibly
Using credit irresponsibly—such as maxing out credit cards, paying only the minimum, or missing payments—can severely damage your credit score. Responsible credit usage involves paying off balances in full each month, making timely payments, and keeping your credit utilization low.
How to Fix It:
Start using credit responsibly by paying off your balance in full every month. If you’re carrying a balance, try to pay it off as quickly as possible to minimize interest charges and maintain a low utilization ratio.
Action Steps:
- Pay off your credit card balance in full every month.
- Only charge what you can afford to pay off immediately.
- If you carry a balance, create a plan to pay it off as quickly as possible.
Wrapping It Up
Maintaining a good credit score requires consistent effort and attention. By avoiding these common credit mistakes, you can improve your score and position yourself for better financial opportunities in the future. The key is to stay proactive—check your credit regularly, stay on top of payments, keep balances low, and use credit responsibly.
Remember, it’s never too late to make improvements. Start small, stay disciplined, and over time, your credit score will reflect your positive actions, opening the door to better interest rates, lower premiums, and more financial freedom.