Building better credit can be a difficult task, especially if you don’t have the right tools. Credit scoring is complicated; what may seem like wise planning could actually lead to further damage down the road. What are these unintentional transgressions? Some common mistakes include:
- Closing old accounts. Accounts deemed “old” and “unused” should be closed, right? Wrong. A long and positive history is responsible for 15 percent of your credit score. Closing old accounts will prevent you from cashing in on the longevity you have earned. Avoid a credit score dent by keeping your oldest accounts open and active.
- Applying for new credit. New credit is an important part of maintaining a dynamic financial life, but without proper foresight, the effects can be less-than-positive. Consider the following example:Stephanie wants to buy a new house at the end of the year. Her credit score is 724—decent but still too low to qualify for the best mortgage rates. In an effort to raise her score, Stephanie applies for a new Visa card. She uses the account regularly, paying her balance on time and in full each month to avoid late fees and accruing interest. When she applies for a mortgage 9 months later, she is shocked to find that her score has dropped 7 points. “I don’t understand this!” she exclaims.Stephanie is an unfortunate victim of the new credit paradox. While her credit card will eventually yield positive results, the initial inquiry coupled with her mortgage lender’s scoring model has produced a lower score and fewer options. The moral: Apply for new credit with caution. Avoid overloading yourself with consumer credit and consider future plans that require a stellar score. Good credit requires in-depth knowledge and mathematical balance.
- Complacency. They say a watched pot never boils, but the opposite is true when it comes to credit. Keeping your score healthy requires attention. Avoid losing focus by:
- Checking your credit reports regularly for signs of false information and/or identity theft.
- Paying off principal debt and accruing interest in order to save money and reduce your credit utilization ratio.
- Continuing to learn about the factors that define your score and ways to improve every day.
- Trusting others. Trusting others. Like a Social Security Number, your credit score is a personal identifier—a number that applies to you and you alone. Giving others access or control over your credit score can be a big mistake. For example, is your spouse responsible for paying the bills? What happens if he or she forgets? Be sure to employ a back-up plan to prevent future damage to both your scores. Similarly, how many loans have you cosigned? Do you understand the implications of vouching for another person’s debt? Putting yourself on the line for a loved one is admirable, but it should never lead to personal damage. Weigh pragmatism and trust with equal measure. Don’t allow emotions to cloud your judgment.
