Five deadly pitfalls to avoid when building your credit score
Most consumers choose to manage their debts to improve and maintain their credit scores. Your credit rating may fluctuate depending on your credit use.
The scoring system helps lenders determine your likelihood to repay new debts based on your history. However, each lender can approve or deny your application based on how they interpret your credit report.
Whether you’re establishing a new credit rating or rebuilding your scores after financial mishaps, a great score can unlock favorable financial opportunities. Here are five of the biggest pitfalls to stay away from when building your credit score.
1) Paying your bills late
Late and missed payments on bills like credit card balances can tank your credit score. However, this is a common mishap for people struggling with poor credit scores. Typically, your payment history contributes to more than a third of your credit rating.
A single late payment is enough to compromise your credit repair efforts since the impact on your report lasts about seven years. If you accumulate significant unpaid bills, the creditor can outsource the debt to collection agencies, which could further hurt your rating.
The best way to prevent late payments is to set automatic payments, but if you don’t have enough money for the entire balance, you can select to pay a specific amount to avoid penalties.
While some credit providers offer a brief grace period, others will enforce penalties immediately after the due date. However, the late payments remain unreported for one month. You can use this period to clear outstanding balance and avoid negative reporting.
2) Limiting your credit use to credit cards
A strong credit rating is a result of diligent utilization of both installment loans and credit cards. While credit cards are more important in the modern world of online shopping, having a credit file dominated by revolving credit may not be perfect.
Rebuilding your credit rating requires strategy and dedication. It’s critical to utilize various forms of credit facilities and boost your progress. For instance, auto loans, mortgages, and outlet-specific credit financing can help diversify your credit portfolio. Ideally, short-term credit or loans for bad credit require monthly payments. And every time you pay, you’re telling potential lenders that your budgeting skills are improving.
3) Maxing out available credit options
The credit utilization ratio is the second biggest factor impacting your overall credit score. Basically, this is the average amount of credit available, depending on your maximum borrowing limit.
A high credit card balance increases your utilized credit, which can hurt your rating. Ideally, you should use about a third of your credit limit to safeguard your credit score. When possible, maintain the lowest possible credit utilization ratio to avoid the chances of overdue balances and negative reports. For example, if your limit is $2500, you should borrow up to $750 and ideally $250.
However, if you have outgrown your card limit and your monthly charges exceed the ideal utilization percentage, it’s prudent to request a limit increase. Most importantly, maxing your credit options can be quite expensive since high balances attract higher late payments. In addition, high balances come with hefty interests, which may be unfavorable for anyone trying to climb out of debt.
4) Applying for multiple cards at once
After working diligently to restore your credit scores to good levels, you can easily qualify for better credit cards. However, you should submit your applications sparingly. Most people seek out hard-to-get credit cards once they achieve a good rating. However, hard credit report inquiries impact your scores and each hard inquiry tanks your credit rating by five points. This means that two subsequent queries will show different results.
New credit contributes about a tenth of your total score but may be given more weight for new consumers with limited credit history. While you may be eager to get a better credit card, give your report enough time to recover from previous hard inquiries. Otherwise, successive hard inquiries may destroy your stellar credit score.
5) Neglecting your billing statements
Checking your billing statements is essential when building your credit score. The statements help you understand your credit card usage tendencies. This is more important if your monthly charges are higher than your income.
While spending small amounts once in a while may seem harmless, the amounts can add up with time and affect your credit utilization ratio. Most importantly, tracking your billing statements helps you identify fraudulent or wrong entries that might compromise your score. If you can identify the errors early, you can dispute the entries and prevent unnecessary point deductions.
Rebuilding your credit score is within reach
Rebuilding your credit rating requires hard work and diligence, but it’s within reach if you’re committed. Regardless of your efforts, it’s easy to compromise your score, especially if your rating is unstable. Typically, it’s vital to understand how various actions affect your score. Besides paying your bills and tracking your reports, make sure to apply for new credit on a need basis.