Top Ten Credit Mistakes
There are any number of mistakes that can be made that will damage your credit – sometimes a little, other times much more. Your credit can be a fragile thing, but knowing what mistakes not to make can save you years of frustration and thousands of dollars. Some of the mistakes on this list are common sense, but others may surprise you. The more you know about your credit, the better you'll be able to protect and build it.
Closing Credit Cards
Although it may not seem so at first, closing your credit cards is probably the single worst thing you can do to damage your credit, with missing payments very close behind. You see, one of the major factors in determining your credit score is the length of your credit history. Even if you no longer use a particular card, there are several good reasons NOT to close it.
First, they will eventually fall off your report anyway, and in general, you don't want this to happen. Under federal law, most items can be reported up to seven years after the date of last activity. Use your old cards every few months for small amounts – lunch at the deli, filling your gas tank, etc. Then, make sure to pay them off immediately.
Keeping the cards active also helps your credit score. Part of your credit score is determined by your utilization measurements – in simple terms, how much you use the credit that you have. By using older credit cards, even if it's infrequently, you'll actually be bettering your score.
Missing Payments
Missing payments is a little more "common sense" than not closing old credit cards, but even so, many people overlook this one. The reason that missing payments is such a bad idea is fairly obvious as well. The credit bureaus are, for the most part, keeping a record of your credit history. A missed payment – even after the account has been paid, can damage your score for up to seven years.
Also remember that other factors contribute to how much a missed or late payment will affect your credit score. For example, the frequency of missed payments, how recently the payments were missed, and the severity, or how late the payment is. Payments that are missed by a week or two may not affect your score as much as a payment that is 90 days late or more.
Settling on past-due or collection accounts
Settling refers to the practice of a lender accepting a smaller amount than what is owed in order to close the account. For example, if you owe $1,000 on a credit card that is severely past due, the credit card company may accept $500 in payment, and close the file Although this may seem like a good idea and certainly lowers the overall debt, the lenders usually report the deficiency, which is the difference between the original amount owed and the settlement amount, as a negative item.
As a general rule, balances should be maintained around 30-40% of the available credit limit.
Maintaining high credit card balances
This point is fairly straightforward as well. As a general rule, balances should be maintained around 30-40% of the available credit limit. The closer you get to the available limit, the more this will affect your score, so it's always best to keep the balances on the low end.
Inquiries
Every time you fill out a credit application and a lender runs your credit, your report is marked with an inquiry, meaning that someone has requested a copy of your credit report. In and of themselves, inquiries aren't a bad thing. Too many of them can damage your score. You see, the credit bureaus know from statistical studies that people with large numbers of inquiries, on average, are greater credit risks. Keeping the number of inquiries down by applying for credit only when it's necessary will help to maintain your score.
Believing that all credit scores are the same
There are hundreds of credit bureaus out there, and consequently, just as many or more different types of credit scores. Without going into huge detail, the important thing to know is that the most common score is a determiner of how risky it is to extend credit to someone. The higher the score, the higher the risk. The Fair Isaac Corporation (FICO) provides one of the most common of these credit risk scores. There are any number of websites where you can find your credit score, just make sure what you're getting (especially if you're paying for it) is the genuine article.
Believing that all credit scores tell the same story
As mentioned in number 6, above, there are different types of credit scores, or scoring models, and not every credit score tells the story of you as a credit risk. Some of the other scoring models are listed below:
Insurance risk
Yes, insurance companies use credit scoring to determine how likely you are to file a claim, and lower scores mean higher premiums.
Response rates
This model is used by the credit industry to determine how likely you are to respond to a pre-approved offer. You thought it was random?
Revenue potential
This one is used by credit card companies to determine how likely you are to use their card and generate revenue for them.
Collect ability
As you can probably figure out, this one is used by collection agencies to determine how likely you are to repay your collections.
Bankruptcy potential
Just what it sounds like. It's a pretty safe bet that if this score is too high, you won't be getting credit any time soon.
Not understanding your credit rights
The Federal Fair Credit Reporting Act, or FCRA, was enacted to protect you, the consumer. There's a lot to it, and you can read the whole thing at www.ftc.gov, but the important points to start with are as follows:
Permissible Purpose
Your credit file can only be accessed for eight reasons. The two most notable are if you want a copy of your own report, which you're entitled to once every 12 months, or as part of a legitimate business transaction, meaning you filled out an application and gave a business permission to see your report.
Right to dispute
There's a wealth of information available on how to dispute items on your credit report, so I won't go into too much detail here, but the FCRA gives you the right to dispute anything in your credit report that you feel is inaccurate, misleading, unverifiable or untimely.
Your right to a free copy of all three of your credit reports
An amendment to the FCRA, the Fair and Accurate Credit Transactions Act (FACTA) allows you to get a free copy of your credit report from each of the three major credit bureaus for free, once every twelve months. You can get your reports online at www.AnnualCreditReport.com, or you can write to the bureaus and request that they send you a copy.
Not knowing that you have three reports and three credit scores
Most people don't understand that the three major credit bureaus are each private businesses that are run for profit. The three bureaus – Equifax, Experian and TransUnion are competitors. Although they each maintain information on around 250,000,000 consumers, they don't share information with each other, and this accounts for the discrepancies between the bureaus that are sometimes found. Knowing that there are three separate major bureaus that all maintain information on you independent of one another is important if you need to repair your credit, as the same negative item may be affecting all three bureaus, or it may only be reflected on one report.
Not having credit (or a credit score)
Many people make the choice to use only cash and avoid credit altogether. This is generally not a good idea. You see, because the credit system in our country is designed to determine your credit worthiness, it reflects positively on people who have shown the ability to responsibly manage their credit. Any activity that detracts from this (missing payment, settlements, etc.) will bring your score down, and not using your credit at all can be much worse than a little self-discipline and planning.