Any of these credit score mistakes could cost you big time!
5 Big Credit Score Mistakes
by Stella Walker
Be Credit Smart
Think Twice Before Closing Old Accounts
How to Correct an Erroneous Credit Report
There are small mistakes and big mistakes, in terms of your credit score. Small mistakes only decrease your score by a few points and rebound quickly. Big mistakes will slash your score by the hundreds and leave your creditworthiness devastated for years. If you can avoid the big ones, life will be a lot easier, because your lifestyle will remain open to more choices. Below are the five biggest credit score mistakes to avoid at all costs.
- Missing a payment: If you miss a credit card payment, it could decrease your credit score by more than 100 points. However, credit card companies give you 30 days after the due date to make a payment before they report it to the credit bureau and 60 days before they increase your interest rate, giving you a little leeway. If your payment is less than 30 days late, all you will incur is a late fee. If it's your first missed payment, some credit card companies will waive the late fee per your request. If the missed payment is reported to the credit bureau, it will take about a year for your credit score to rebound, and the missed payment will remain on your credit report for seven years.
- Not regularly checking your credit report: Even if you faithfully make your payments or rarely use your credit cards, it is still important to review your credit report once a year. This is because credit reports often contain mistakes that can only be spotted by you. Credit reports are also the best way to discover fraud and identity theft. Be advised, though. Ridding your credit report of mistakes is not an easy process. The Federal Trade Commission provides more information about how to obtain your free yearly credit report and how to fix any mistakes in this report on their official website.
- Closing an old account when your credit utilization is high: Closing an old credit account that you no longer use is not necessarily bad for your credit score, but you want to make sure you only close it when the balances on all your other credit cards are either very low or completely paid off. This is because closing an account will increase your credit-to-debt ratio. For example, let's say someone has four credit cards with a total credit limit of $10,000. If they charge a total of $5,000 on three of those cards, their credit-to-debt ratio will become $5,000/$10,000 or 50%. Now, let's say they want to close the fourth credit card account, which has a credit limit of $2,000. If they were to close this account before they paid off their debt, their credit-to-debt ratio would become $5,000/$8,000, or 62.5%. Anytime your credit-to-debt ratio increases to 50% or more, your credit score will suffer. Before closing any credit account, make sure the loss in credit won't cause your ratio to increase by any more than 35%, the number most banks and financial institutions like to see.
- Opening a joint credit card account: Having poor credit history or no credit history makes it nearly impossible to get accepted for a credit card. If you have a family member or close friend who is in this boat, resist the temptation to help them out by opening a joint credit card account with them. Even if it's your own child, it is not a good idea, because any misstep they make will also become your responsibility and be reflected on your credit report. Instead, consider opening a joint account without giving them charging privileges. However, be sure that you yourself are responsible with the card; otherwise, you will do them more harm than good.
- Co-signing a lease or loan for family or friends: As with opening a joint credit card account, think twice before co-signing a family member or friend's lease or loan. Although you want to trust that they can and will make their monthly payments, you essentially have no control over it. However, you will be made responsible for it if they default, and your credit score will suffer tremendously.
As a regular contributor to several finance websites, such as CreditScore.net, Stella Walker uses her knowledge of economics, consumer trends and budgeting to help readers better understand their own personal finance issues.
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