Common Credit Mistakes and How to Avoid Them

Credit, or the ability to borrow money when needed for life’s many expenses — ranging from small things such as dining out, to major life purchases such as a home or car — is an essential part of modern American life. Your ability to obtain and use credit when needed is critical. However, many people take credit for granted. Misuse of credit can have a devastating effect on your ability to obtain credit when it is vitally needed, and can have a devastatingly negative effect on the quality of life for you and your family. Many people are blissfully unaware of the credit mistakes they are making on a daily basis.

Your credit worthiness, or ability to obtain credit, is based on your credit score. An individual’s credit score is determined by credit bureaus. which look at several factors, such as amount of credit available, income, and credit history to determine an individual’s credit score.

While there a various models and systems used to determine credit scores, the generally agreed-upon range for credit scores is 301 to 850. The lower the score, the less credit-worthy lenders judge you to be and the harder it is for you to obtain credit; conversely, the higher the score, the easier it is for you to obtain credit. Below 600 is generally considered a “bad” score, while 750 and above is considered a “good” credit score.

According to major credit reporting bureau Experian, the average credit score for Americans in 2016 was 673.

Here are a few common credit mistakes which can lower your credit score:

High credit utilization: Many credit sources, such as credit cards and bank lines of credit, have a specific amount of credit offered. The amount of that credit that you use is called ‘credit utilization’. High credit utilization occurs when you use and maintain a high percentage of usage of the total available credit that credit line — for instance, if you regularly have $1,700 in debt on a credit card with a total credit line of $2,000, you have a credit utilization of 85 percent on that card, which is considered very high. High credit utilization for all available sources of credit, such as several credit cards, is considered a red flag by credit rating bureaus and can severely lower your credit score. It is one of the most common credit mistakes people make. On average, most Americans have a 24 percent credit utilization rate. However, the lower your utilization rate, the better your credit score and the easier it will be for you to obtain additional credit.

Late or missed payments: Late payments can have an even greater negative affect on your credit score than high credit utilization. Late payments suggest to creditors that you cannot be trusted to make payments on time and are a poor credit risk; however, even late payments are not as bad for your credit score than missed payments. Even one missed payment can lower your credit score by as much as 100 points and make it very hard for you to obtain credit in the future.

Applying for several new credit cards at once: Each time you apply for a new credit card, or request additional credit on an existing card or other credit account, your credit history registers what is known as a “hard inquiry”. Each hard inquiry can knock several points off your credit score. In addition, the presence of several hard inquiries occurring at the same or approximate time can raise red flags for potential lenders considering your credit worthiness or ability to repay your debts.

Closing credit cards: As non-intuitive as it seems, closing a credit card, particularly one that has been open for a considerable amount of time, can actually lower your credit score. This is because lowering the total amount of credit available has the effect of raising your credit utilization rate. For instance, if you have $15,000 in total available credit and are utilizing 24 percent of that credit, or $3,750, the utilization rate would increase to 37.5 percent if you were to eliminate unused credit cards that represent $5,000 in available credit. Even if you don’t use the card, you should still keep in open to keep your amount of credit utilization rate as low as possible. As you can see from our example, once you close a line of credit, you lose that amount of available credit and your credit utilization goes up. It is even more important to keep older credit cards because the average age of credit is also an important factor in determining credit scores and can take years to build up. In addition, an average credit age of less than seven years can negative affect and lower your overall credit score.

Contact us for more information on common credit mistakes, rebuilding, and maintain a high credit score.