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Are you wrecking your credit without even knowing it?
Your personal credit is important, as a good credit score can help you get the loans you need for important life purchases, such as a new car or a first home. Landlords will often check your credit history prior to leasing you an apartment. Many jobs, especially in the Federal Government, require applicants to have a good credit rating as well. However, despite the importance of good credit, nearly one-third of Americans have sub-par credit scores.
It doesn't have to be that way, though. Many people inadvertently damage their credit or put it at risk by making simple mistakes with how they manage their finances. Let's look at six common credit mistakes that may be hurting your credit right now.
1. Late Payments
The easiest way to hurt your credit fast is with late payments. When it comes to computing your credit rating, payment history accounts for over a third of your overall FICO credit score. What many people don't realize is that virtually any entity you do business with can report a late payment to a credit bureau, regardless of the amount. Therefore, if you forget to mail the $24.99 check for your child's clarinet rental this month, it could affect your credit score. Paying all bills big and small in a timely manner is a good way to stay out of trouble.
2. Applying for too Much Store Credit
Virtually any large store or supermarket has some sort of credit program these days. Sign up for a store account and you'll get a discount on your current or future purchase. While it may seem smart to take the deals, doing so can actually harm your credit. New credit applications account for about 10% of your overall credit score. An increase in applications is perceived as bad, and it can drive your overall score down. So, make sure you think twice before signing up for a new card at your favorite electronics store.
3. Opening too Many Credit Cards
Opening a bunch of new credit cards at once will spur application reports to the credit bureaus, resulting in many of the same drawbacks you get with store credit. While there are benefits to the overall amount of credit you have available (see the comments below about canceling credit cards), opening several new credit cards in a short period of time will also decrease your average credit account age, which can hurt your credit rating as well. So, proceed with caution when deciding whether to open new credit card accounts.
4. Canceling Credit Cards
It almost seems counterintuitive, but canceling paid-off credit cards can also hurt your credit score. After paying off a credit card, many people instinctively want to celebrate getting out of debt by closing out the card. However, doing so will immediately lower the overall credit you have available, which will likely lower your credit score due to the resulting hit to your credit utilization ratio. Therefore, when you pay off a credit card debt, be sure to cut up the card but keep the account open.
When it comes to cosigning loans, no good deed goes unpunished. If you decide to help a relative or close family friend out by cosigning a loan, you put your credit rating at considerable risk. The credit bureaus will look at the primary borrower's payment activity much as they would your own; any late payments, or a potential default, will affect your credit score as if you took out the loan yourself. So, while helping out someone you care about financially may be second nature to you, ensure you're cognizant of the risks to your credit.
6. Failing to Monitor Your Credit
It's now easier than ever to monitor your credit rating. However, are you doing it? Many Americans, even those planning to buy a home or a new car, often choose not to order a credit report, or check their score. Failing to do so could let a simple issue such as a small bill that goes unpaid due to an address error drag your credit rating down from good to fair.
Additionally, if you're actually trying to improve your credit rating, ignoring a credit report's feedback will make it difficult to find areas to focus on. You can order a free credit report once per year from each bureau, and many banks and financial services let you monitor your credit score as well. Make sure you take advantage of these services and monitor your credit at all times.
If your credit isn't where you want it to be, a few simple errors on your part could be the culprit. Even people with the best intentions can damage their credit scores by taking actions that seem like the right thing to do. Consider these common mistakes today and make sure you avoid anything that can wind up hurting your credit and then start on the road to building up good credit.