Lenders, utility companies and even employers are considering consumer credit reports and data provided by credit bureaus more than ever before. Even world governments (e.g. Greece, Italy, France, and the United States) are having their credit ratings scrutinized.
Keeping your credit in tip-top shape is very important.
The scary thing is credit can be tarnished if not closely monitored. The simplest mistakes, especially as you are improving your credit, can set you back 10 to 20 points.
Let’s take a look at a few common credit mistakes I hear people making over-and-over.
1. Closing Credit Card Accounts
This is one of the biggies. Only in unique circumstances should you ever close an old credit account.
There’s a temptation to close old credit cards you’re no longer using. In fact, logic even seems to dictate that unused credit cards laying around are an unnecessary temptation. Unfortunately, ridding yourself of this temptation, depending on the depth of your credit history, could hit your credit score pretty hard.
Why is this? Payment history is one of the biggest factors in your credit score (about 35 percent). The length of that credit history is a big part of that measurement.
When you close a credit card, the date of last activity locks in and in seven years, the history you’ve built up on that card may disappear. This may lower your average credit history, particularly if the card was one of your oldest accounts, which may take a toll on your credit score.
So if you’re paying off debt, celebrate your victory. Maybe even cut it up, but don’t close it.
2. Missing Payments
This should be a no brainer. Still, many folks get sloppy and miss payments by a few days here and there. Set up a calendar or reminder system to make sure you never miss a payment – not one payment, not by one day.
Having said that… even the best personal finance managers make mistakes from time to time. Chances are you’ll make a mistake and miss a payment. Don’t let that one-time slip-up damage your good name!
Here’s what you do…
Call your creditor immediately and in your nicest, kindest voice, follow this script:
“Hi Jim from [insert credit card company]!
It looks like I have missed my payment by a couple of days. I’ve been your customer for years and never slipped on a payment – I’m not sure how this happened.
I want to confirm that you got my payment in full (or I want to make the payment immediately) and ensure it doesn’t affect my credit report.”
Usually that short, honest conversation will prevent the credit card company from reporting your oversight and might even get the late fee wiped if you ask nicely.
3. Settling Past Due Accounts
This can be a double whammy, costing you points on your credit score and adding to your taxable income.
Settling past due accounts can put an additional long term blemish on your credit report. Not only do you get dinged for missed payments, you will also be marked as “settled” (meaning the creditor got left short) versus “paid in full.”
As you can imagine, this can be a real detractor from future creditors giving you credit or loaning you money.
Now the second whammy: Any amount of debt your creditor “forgives” will typically be added to your taxable income. The dangerous part of this is if you didn’t make a lot or are out of a job (good possibility since you couldn’t pay your debt) that extra taxable income could force you to come up with cash to pay Uncle Sam. Now you just hopped out of the skillet into the frying pan; your new creditor is the IRS.
4. Over-Utilizing Credit
To have credit, you have to use credit. However, be careful of overusing it.
How much you owe is another big factor in calculating your credit score (about 30 percent). A significant part of that factor is the proportion of credit lines and installment loan amounts used, AKA credit utilization.
There are no specific guidelines or guarantees on this one, but the general rule of thumb is that no credit card or installment loan should be above 35 percent utilized – and the lower, the better.
5. Too Much Shopping for Credit
When you are looking for a new credit card or loan, carefully consider your financial needs. Certainly compare various credit options. But, be very careful of shopping by submitting actual credit card or loan applications.
Low interest rates and reward programs are just a few of the important benefits you get from smart credit shopping. However, avoid actually applying to several credit cards just to see who will approve you; or even worse, applying for every new offer you get in the mail.
The last thing you want is to continually pepper your credit report with tons of “hard” credit inquiries. These are credit inquiries that are reported on your credit report every time a creditor or lender checks your credit for the purpose of qualifying your application for credit.
(Credit Definition: A “hard” inquiry should shouldn’t be confused with a “soft” inquiry, which is when your credit report is checked for reasons other than for approving you for credit, i.e., you check your own credit report, an employer does a background check or a bank does an identity verification.)
6. Not Understanding Your Credit Rights
Finally, and most importantly, you have the right to a fair and accurate credit report.
Your credit rights are protected under the Fair Credit Reporting Act (FCRA). This law created rules and regulations that govern how creditors and credit bureaus must handle your credit information to ensure everything is correct. Here are some of the high points:
Your credit information can only be used for a permissible purpose. Examples of this are consumer disclosure (i.e. allowing you to review your own credit) and as a part of a legitimate business transaction, such as qualifying you for a credit card or loan.
You have the right to dispute your credit information. That is why we always remind you to check your credit report regularly and dispute any inaccuracies promptly.
You have a right to a free copy of all three of your credit reports each year on www.annualcreditreport.com.
What mistakes have you made over the years? What are some of the things you’ve heard about credit that doesn’t sound exactly right? Ask us in the comments.
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- 6 Tips to Dating a Better Credit Score
- How the Debit Card Fee Brouhaha May Affect Your Credit Card
My problem is I have been on Disability for about 8 or so years. I have not had any new accounts of any kind (other than rent, utilities, and hospital and doctors bills) and don’t have anything for a very long, long time that I haven’t paid. My student loans were forgiven (I don’t have to pay them back); most everything negative on my credit reports is so very old,and somehow they manage to keep it on there. The list tons of pages for student loans (duplicates) that make it look like I had 4 or 5 and have never cleared up things I have called them on, other than posting a comment or two that I have made to object to items. They have a dozen AKA’s that make me look like a criminal, when it is obvious they are typos. I have only applied for actual credit perhaps twice in all these years and my score is probably 500 if I am lucky. One credit bureau hasn’t been able to find me in years so I can’t get that report no matter how I have tried. Some mortgage keeps showing up from 2004 and I haven’t owned a home since 1982. I know everyone says all this is fixable, but I have been trying on and off for years and I am not sure I care anymore……oh, I did have my name on a BofA Credit Card in my sister’s name for a long time and made all the payments absolutely on time… she took it back and told me she would take care of it so I have no idea what happened to that.