Credit is a tricky thing to master and unfortunately, it’s one of the most important factors when trying to make a major purchase such as for a car or home. Most people don’t understand why their credit scores fluctuate and how their daily spending habits influence them. While most of the credit crunching formula is a mystery, there are certain habits that can hurt your credit score and should be avoided.
1. Closing accounts
You may think that less accounts means less of a risk and a higher score, right? Wrong. Closing accounts brings down your available credit limit, making any balances you do have look like a greater percentage of your total availability. You want to keep your debt to income ratio low, so having open credit is actually a good thing, not a liability.
2. Missing payments
This is pretty obvious, but some people think missing one or two payments won’t hurt their credit scores. It will. It will hurt a lot. Creditors will look at how frequently you miss payments, how recently you’ve missed a payment and what the missed amount was. If you miss frequently, have missed recently, or missed a big payment, you may be in trouble.
3. High Balances
Having high balances on your cards makes you appear maxed out. Lenders will see that you’re struggling to get-by and they won’t want to take a risk on you. In general, you should use your cards sparingly and pay them down each month. While having zero balance month after month looks like a bad thing, so does having a high balance.
4. Settling with a lender
Settling may seem like a good thing to most people because it means that you were able to negotiate with the credit card company to pay them less than originally owed. You saved money and they got their payment. Unfortunately, the way that lenders report these settlements often has negative impacts on credit scores. A derogatory comment by a lender could hurt your score as much as a 90-day late payment.
5. Excessive credit shopping
Multiple credit inquiries can have an impact on your credit. You’ve been told all your life that shopping around is a good thing. Unfortunately, that’s not true when it comes to credit. Shopping around is a very bad thing and lenders will look at excessive credit inquiries as a potential risk because it makes you look like you’re about to take out a large amount of money. Nobody wants to take a risk on someone who may be opening 4 to 5 accounts at once that they won’t be able to pay back.
Keeping these five things in mind can help keep you from making some of the most typical credit mistakes. Being careful about your finances can help you enjoy the benefits of a good credit score throughout your life. Remember, credit is hard to build and easy to destroy, so treat it with the respect it deserves.