Most would say forming good habits for the body, mind, and soul is a positive action to take in life. However, do not forget about the practices you might have in place for your finances, such as your credit score. While there is plenty of advice on how to build credit on the BestCards site, make sure to avoid these 10 habits for a better credit score.
1. Avoid Paying Your Credit Card Bill Late
Stop! Do not miss that credit card payment. A big part of your credit score makeup (aside from the credit utilization ratio) is your payment history. Your payment history keeps track of revolving and installment credit/loans. Missing or making a late payment is detrimental to your credit score. It shows creditors how responsible you are with your money. A credit score is one of the primary factors banks look at to consider you for future loans or credit, such as car loans, mortgages, and more.
2. Closing Credit Card Accounts
Believe it or not, closing a credit card account may harm your credit score. Make it a habit to keep your unused credit card accounts open and active. The reason is that when a credit card account is closed, your credit utilization ratio drops because you no longer have the additional line of credit available.
For example, if you have two credit cards, each with a $2,000 credit limit, your total credit available is $4,000. If you use $1,000 on one of your credit cards, your credit utilization ratio would be 25%. Experts recommend no more than 30%. If you decide to close the second credit card account, this will bring your total available credit down from $4k to $2k, half of which you have already used, placing you at a 50% credit utilization ratio. Way above the recommended 30%.
The second reason you should avoid closing out credit card accounts is that doing so also affects your credit history record. Credit history is another major factor that determines your credit score. Closing out an older credit card account erases the credit you have built over time. And a mature credit history makes for better credit.
Related Article: Should You Close Old Credit Card Accounts?
3. Not Using Your Credit Card
If you have a credit card sitting in your wallet without use, it is time to break that habit. You can achieve a better credit score by using your credit cards responsibly to build a positive credit history. It’s okay to keep your credit card debt to a minimum if that’s what you feel comfortable with.
Consider using your credit cards for monthly expenses you know you must get paid anyway, like a light bill, groceries, gas, etc. If you’re not using your credit cards, on-time payments can not get reported by the credit bureaus to boost your credit score. Paying off a monthly card balance goes on the record to show you as a trustworthy borrower, so be sure to use your credit cards if you would like to work towards boosting your credit.
4. Using the Wrong Credit Card for Major Purchases
Do not just pull out any old credit card for your major purchases. Break that habit and become mindful of the ticket price and your credit limits because accidentally maxing out a credit card can harm your credit score. When you max out a card, it places you at a high credit utilization ratio (for the one card), which can negatively impact your credit score.
If your car breaks down and the mechanic costs reach $1,000, you may prefer to cover the expense with a credit card. In this scenario, we recommend picking a credit card with a higher credit limit because using a credit card with an exact $1,000 credit limit will max out your card. A higher spending limit will help manage your credit utilization ratio. A $1,000 purchase on a $10k credit limit will be less of an impact on your credit score than it would on a card with a $1,000 limit.
5. Dodge Co-signing on Debt
Do yourself a favor and don’t co-sign any debts to ensure your credit stays at its best. There is much risk in co-signing debt for friends and family, especially the risk of them missing a payment or making late payments. These actions will undoubtedly affect you as a co-signer because you have signed on to take responsibility for their debt which can also mess with your credit utilization ratio or any plans you may have for particular loans like mortgages or financing a car.
6. Avoid Leaving Credit Report Errors Unfixed
You cannot let credit report errors get swept up under the rug. Any mistakes on your report are potentially affecting your credit score negatively. If you spot an error on your credit report, act. The credit bureaus will investigate the mistake and remove it if applicable. Once the errors on your report get fixed, your credit score should look much better.
7. Letting Debt Go to Collections
Do your best to prevent any debts from going into collections. Once your debt goes into collections, your credit score certainly takes a hit. If your credit card debt goes to collections, call the collections agency, and work out a payment plan so that your debt at least shows up as a paid and closed inquiry. Your credit will still take a blow. However, the chances of the inquiry rolling off in fewer years are much more probable.
8. Applying for Credit Cards Often
Maybe your credit score is looking better these days, and it is no surprise you would probably want to apply for some of the more popular credit cards on the market. However, we do not recommend going on a credit card application rampage. With every credit card application, your credit score takes a minor hit. Banks and lenders may read the multiple applications on your card as a red flag which may lead them to deny you a loan or credit you may soon need.
9. Not Having a Credit Card
This one might seem like an obvious tip, but to build adequate credit, you should get a credit card. A credit card is the easiest and one of the fastest ways to build or better your credit. If the credit card is used responsibly, you will be on your way to a prime credit score. There are credit card options for all sorts of credit scores. If your credit is not at its best, you may consider a secured credit card with upgrade potential. Some secured credit cards like the Merrick Bank Double Your Line® Secured Credit Card offer a chance to graduate from a secured card to an unsecured credit card.
10. Never Checking Your Credit Score
Finally, if you’re not checking your credit report often, you’re not off to a good start. Something as simple as checking your credit score regularly helps guide you on your way to better credit. Knowing where you stand with your score is a tell for when you may need to change up your credit-building strategy. It’s also a smart way to spot errors or mistakes on your report as soon as they impact your score. Checking your credit score regularly gives you a head start to fixing and optimizing the way you tackle credit building.
Related Article: Best Habits of Credit Card Users with Excellent Credit