Maintaining a good credit score can help when you need a new loan. A high score is an indication to lenders that you can responsibly manage debt. It could result in you earning a better rate on a loan or improving your chances of being approved in the first place.
If your credit score drops, it could be difficult to build it back up. That's why keeping your credit health in good shape is so important. To prevent unexpected dips in your score, it’s best to avoid these actions:
1. Forgetting to pay your bill on time
The single most important factor in determining your credit score is your payment history. Each missed or late payment can have a negative impact on your credit score. If you have a habit of forgetting when your payments are due, there are a couple ways you can avoid missed payments.
Some companies have a way to set up automatic payments, or you can even set up bill payments through your credit union or bank. This way, you can schedule a recurring payment on a certain date each month. The trick to this solution is to make sure that the account from which the payment will be drawn has enough money to cover each bill payment. Regularly check your balance and keep a close eye on the amount due each month.
Another trick is to set calendar alerts on a mobile device or mark the due date on a physical calendar. A simple reminder can help immensely. If you want to be extra cautious, you may decide to set up automatic bill payments and use your calendar alerts as a reminder.
2. Paying less than the minimum amount due
Many bills require a minimum payment if you can't arrange to pay the debt in full. It's always best to pay off your monthly bill in its entirety if you can afford to do so, or at least as much as you can. However, if you pay less than the minimum amount required, the creditor may consider it to be a missed or late payment. In addition to damaging your credit score, paying less than the minimum amount due could result in added late fees and compounding interest on your account.
3. Taking out too many credit cards
Having a credit card can help you build a high score, but taking out too many—especially in a short time frame—can have a negative impact on your score.
You may receive credit card offers in the mail, or a cashier at your favorite department store may suggest taking one out at the register as a way to save money. In some cases, taking these offers can be beneficial, but not always. Only take out a new credit card if it makes sense long-term. If you shop at that department store frequently, the branded card might be worthwhile. If you were considering getting a new credit card, or an offer has a perk that would benefit you, following up on the offer could be advantageous.
However, if you take out multiple cards within a short timeframe, it could result in numerous hard inquiries and will reduce the average age of your credit. Both of these can lower your score.
So, how many cards is too many?
There's no single right answer to this question because every person's situation is different. The key isn't how many cards you have but whether you can keep up with the payments on all of them. If you feel overwhelmed, either by the number of credit card bills you have to pay or the amount you're paying each month, it may be time to rethink your approach to credit card debt. A good guideline to follow is to only apply for credit that you need, plan to use and are able to repay.
4. Closing accounts that you don't need
Creditors like to see that you have experience managing debt, which is why the average age of your credit accounts is so important. If you close an account that you've had for years, it could lower the average age of your credit history, making it appear as though you have less financial experience.
Closing out a credit card will also impact your credit utilization rate. Let's say you have two credit cards, each with a spending limit of $10,000. One has a zero balance and the other a $6,000 debt. With a combined credit limit of $20,000 with a $6,000 balance, you have a 30 percent utilization rate. If you close the zero balance card, your utilization rate will suddenly jump to 60 percent.
It may be tempting to close an account that you've had trouble with in the past—perhaps you've missed multiple payments or it has been sent to collections—the negative marks will usually remain on your credit report for seven years, even after the card is canceled.
5. Racking up a huge credit card bill
Credit utilization is also a significant factor in determining your credit score. This is a ratio comparing how much credit you have access to and how much you actually use. If you have a credit card with a limit of $10,000 and you have a balance of $6,000, you have a credit utilization rate of 60 percent.
In general, your credit utilization rate should be 30 percent or lower. If your utilization rate is a little bit higher than this, you don't have to panic. Various circumstances may call for you to put a larger amount on a credit card, such as if you take out a card to make a large purchase that you plan to pay off over time. Additionally, if you have multiple lines of credit, the utilization score calculation typically factors in all of them to reach an average.
If you have a high credit utilization rate, it's important to have a plan to lower it. It’s best to avoid adding new credit lines just to lower your credit utilization rate; creating a budget you can stick to is a better strategy.
6. Applying for multiple types of credit at once
When you apply for a loan or credit card, the financial institution you're working with will do a hard inquiry or hard pull on your credit. Doing so gives them access to your credit score and credit report so they can make sure you meet their lending requirements.
Hard inquiries also signal to other creditors that you've applied for new credit. Why does this matter? Lenders are generally wary of consumers who attempt to access a lot of new credit within a short timeframe. Without time to get accustomed to a new payment plan, it's hard to tell whether the consumer can handle additional debt.
To minimize hard inquiries, only apply for credit that you need. Additionally, try not to make too many major purchases all at once that would require separate lines of credit. For example, if you recently took out a mortgage, try to avoid buying a new car. It’s even more important not to attempt to open new lines of credit while you’re in the process of buying a home, as this has the potential to impact your home purchase.
7. Staying away from credit altogether
There are many ways to lower your credit score. For some people, it may be tempting to just stay away from credit altogether. This strategy can actually work against you. Avoiding credit cards and other loans will result in a sparse credit history, but lenders typically like to see proof that you can manage credit before they offer you a loan. One of the best ways you can prove your creditworthiness is by showing that you can manage a diverse credit profile.
Maintaining and growing your credit profile
Maintaining a good credit score comes down to a few simple rules:
- Make payments on time and in full
- Keep your balances low
- Consider what you can afford
- Keep old accounts open when possible
- Only take out credit when you need it
Are you in the market for a new line of credit? Whether you're expanding your credit portfolio, beginning to build your credit history, or just would like some advice, OnPoint can help. Reach out or apply online to learn about our loan options.