Common Mistakes that Cause a Low Credit Score

A low credit score will impact your life negatively in more ways than you can imagine. From problems getting loans approved to high-interest rates and insurance premiums, the list goes on. The most common reason for poor credit in America is not understanding credit. If you want to avoid the risks and consequences that come with having a bad credit score, you must pay attention to your payment habits. Here are the most common mistakes that will land you in the low credit score category. 

Late Payment

Payment history information typically accounts for almost 35% of your credit scores. This is why it is one of the biggest factors in calculating your score. A late payment can stay on your report for up to seven years. Overdue payments suggest that you’re struggling with your finances. Hence it becomes extremely challenging to get loans from lenders and companies. 

When your debt outpaces your income, it is obviously hard to keep up with the bills. This kind of situation can lead to a very big credit mistake which is to prioritize one debt over another and paying for only some of your bills, while intentionally skipping the low-priority ones. You must remember that for credit bureaus and creditors all debts are equal. Therefore, you are equally obliged to make your minimum payment for each one of them. So no matter what, always remember to pay at least the minimum requirement for every bill. 

Some people have a busy lifestyle and are just careless about timely payments even when they’re not struggling financially. In order to avoid any delay in your payment, you could make a schedule to follow or set up automated payments for bills like student loans and credit cards. You could also instruct your bank to debit from your savings account, either on or before the due date. This will serve as a safety net in case you forget to pay in time. Also, start paying attention to emails, mail and voicemails to check if a creditor has tried to reach you for a past due balance that you may have overlooked. 

Maxing Out

Another mistake that can hurt your credit score significantly is approaching the maximum limit of your debt. For example, if you have an open credit card and you end up spending almost the entire balance, it will impact your credit score negatively. When credit bureaus see that you’re approaching your limit, lenders refrain from offering you further loans. Being close to your credit limit looks like a sign of financial instability and the lenders take all possible measures to minimize their own risk. Therefore, avoid maxing out lines of credit.

If you are aware that your credit card is close to its limit, don’t use it further for some time. Instead, focus on paying off some of the debt. In case there is an expense that cannot be avoided, try to spread the purchase between several accounts or cards. This will keep you from raising the balance too far on any one of them. 

Not Checking Your Credit Report

Not checking your credit report and being unaware of what it says about you is a big mistake and can be detrimental to your credit history and score. There can be numerous errors in your report that might be causing your score to fall. Example errors include:

  • accounts that have been closed but listed as open
  • incorrect payment amounts for credit cards and loans
  • a fraud account linked to your name

If you keep checking your report regularly, you’ll be in a better position to address these issues and have them cleared. This will give your credit score a noticeable boost. 

Having Too Many Credit Cards

Having too many credit cards at a time can also be risky, even if you don’t use all your available credit and pay each one off monthly. While it’s easy and often tempting to sign up to get an offer for a credit card, whether at a shopping store or in the mail, the long-term effects of those credit card offers must be taken into account. When you use a number of credit cards, it compels the lenders to wonder what would happen if you max out all of them. This is because multiple active accounts make it more challenging to control spending and keep track of payment due dates.

If you’ve got too many credit cards within a short period of time, you’ll have harder inquiries and less credit age, all of which will affect your credit score. Too many inquiries in your report signal the lenders that you may be facing financial problems as you’re desperately chasing credit. And when your credit card balances are increasing, it’s a red flag. The general rule of thumb is to keep credit utilization below 30 percent, be it an individual card or total credit utilization. If the ratio gets a bit too high, you should opt to close one of your newer credit accounts. This will help in keeping your credit history long and utilization ratio low. 

Opting for a Settlement

When facing a credit crunch, you either delay the payment of credit card dues or pay the minimum due amount. In both scenarios, you’ll end up in a debt trap that would be hard to break free. In such situations, borrowers tend to opt for a settlement with the lenders by paying a one-time lump-sum amount which includes the principal and some part of the interest. This may  break the debt cycle, but it will hurt your credit score significantly. It may even decrease your chances of availing any credit in the future. Hence, it is best to pay off your accrued debt in a timely manner.

If you’re pressed for funds, you can borrow from family members, friends or obtain a soft loan from your employer. Find alternative options like credit card debt consolidation via a personal loan as they offer lower APR and shorten the payoff period, thereby reducing your repayment burden and helping you maintain a decent credit score. 

Final Word

Knowledge is key to getting out of debt and having a strong credit score. Now you know many of the common mistakes you could make that would hurt your credit. Make good choices and establish healthy financial habits. Your credit score will thank you.