Unseen practices that potentially harm your credit rating:
Managing finances often means focusing on budgeting, saving, and dealing with debt. However, many individuals overlook one crucial element—credit scores. Small everyday choices can unexpectedly impact a credit score's health, leading to trouble securing loans or rentals. This post highlights seven sneaky habits that might be undermining your credit score and offers solutions to avoid common pitfalls.
What is a good credit score?
A credit score is a three-digit number, usually ranging from 300 to 850, reflecting your trustworthiness in repaying borrowed money. Lenders, landlords, and even some employers use credit scores to assess a person's financial responsibility. Typically, credit scores are computed based on the following key factors:
Payment history
This measures whether you consistently pay your bills on time, including credit cards, loans, and utilities. A consistent payment history shows lenders that you are reliable and responsible.
Credit utilization
This refers to the percentage of your available credit that you are using. For example, if your total credit limit is $10,000 and you owe $3,000, your credit utilization rate is 30%. Keeping this ratio low, preferably below 30%, is essential. High utilization indicates financial strain, which can lower your score.
Credit history length
This considers the age of your credit accounts. Lenders look at the age of your oldest account, your newest account, and the average age of all your accounts. Maintaining older accounts open can help your score, as it gives lenders more insight into your financial habits.
Credit mix
This evaluates the different types of credit you manage, such as credit cards, auto loans, and mortgages. A mix of credit types demonstrates your ability to handle multiple financial responsibilities, positively contributing to your score.
Fair (580-669)
Credit bureaus like Experian, TransUnion, and Equifax compile this information into reports, which lenders use to assess your credibility.
7 habits that could secretly be harming your credit score
Below average but not the worst. Borrowers may still qualify for credit, but terms are often less favorable.
Even if you're responsible with money, small financial habits could be undermining your credit score without notice. These behaviors are easy to overlook, but they can accumulate over time, making it harder to secure loans, rentals, or even credit card perks. Here's what could be holding your score back and how to fix it.
1. Checking your credit score too frequently
Regularly checking your credit score with services that trigger hard inquiries can temporarily lower your score. Instead, opt for tools that use soft inquiries, which let you check your credit without damaging it.
2. Ignoring old debts you thought were gone
Good (670-739)
Even small balances from forgotten utility bills, medical expenses, or closed credit cards can end up in collections. Resolve old debts by reaching out to the creditor to settle them or dispute inaccuracies.
3. Applying for store credit cards just for discounts
The range where most borrowers aim to be. This reliable score allows for better loan options and reasonable interest rates.
Retailer credit cards are tempting, but opening too many accounts in a short period can hurt your credit. Be selective with new credit applications and try to space them out.
4. Letting small automatic payments slip through
Subscriptions, gym memberships, or recursive charges, despite being small, can be costly if missed. Set up automatic payments for these to ensure timely payments and protect your credit score.
5. Using too much credit, even if you pay it off
Very Good (740-799)
A high credit utilization rate, even if you pay your bill in full every month, can still lower your score. Monitor your spending and make multiple small payments throughout the month to keep your utilization low.
6. Closing old accounts without thinking twice
A strong score signals solid financial habits. Borrowers in this range often receive favorable terms and perks from lenders.
Closing older accounts can hurt your credit score by shortening your credit history and increasing your utilization rate. Only close accounts with high fees.
7. Not checking your credit report for errors
Inaccurate credit reports can lead to lower scores, higher interest rates, and even loan denials. Regularly review your credit report to catch mistakes and correct them.
How to avoid these hidden credit score mistakes
Excellent (800-850)
- Monitor your credit without hurting your score by using soft inquiries.
- Stay on top of old debts by regularly checking your credit report and resolving inaccuracies.
- Be selective about new credit cards and space out applications.
- Set up automatic payments for subscriptions, utilities, and credit cards.
- Manage your credit utilization wisely through regular monitoring and planning.
- Keep old accounts open.
- Check your credit report regularly for errors and dispute inaccuracies to protect your score.
Why is a good credit score important?
The gold standard. Borrowers with excellent credit typically qualify for the best interest rates and financial products.
A good credit score affects more than just whether you get approved for loans. Improving your credit score can enrich various aspects of your financial and personal life.
- Better loan terms: A high credit score signals that you are a reliable borrower, often translating to lower interest rates and better loan terms.
- Easier approval for housing: Landlords and property managers frequently check credit scores to evaluate applicants' reliability as tenants. A higher score increases your chances of securing your desired rental property.
- Lower insurance premiums: Insurance providers may use credit scores to calculate auto, home, and even life insurance premiums. A strong credit score can help secure lower rates.
- Employment opportunities: Some employers review credit reports as part of their hiring process. A good score demonstrates responsibility and trustworthiness.
- Utility and mobile phone contracts: Utility companies and mobile carriers may run a credit check before setting up service. A higher score ensures smoother approvals.
- Interest-free financing options: Retailers offering interest-free financing for appliances, electronics, or furniture typically require a good credit score.
- Lower security deposits: A strong credit score can help you avoid or lower security deposits for rentals, utilities, or other services.
Take control of your credit score today by understanding and addressing these lesser-known factors that can impact your credit score. Smart financial decisions will ensure a better credit score, increased financial flexibility, and a more secure financial future.
A good credit score is a three-digit number reflecting your trustworthiness in repaying borrowed money, ranging from 300 to 850. It is an essential factor for lenders, landlords, and some employers when assessing a person's financial responsibility.
To maintain a good credit score, it's crucial to focus on key factors such as payment history, credit utilization, credit history length, credit mix, and avoiding mistakes like checking your credit score too frequently, ignoring old debts, applying for store credit cards just for discounts, letting small automatic payments slip through, using too much credit, closing old accounts without thinking, and not checking your credit report for errors. By consciously addressing these aspects, you can ensure a better credit score, increased financial flexibility, and a more secure financial future.
