A credit score is a mere three digits, but those three digits can have a significant impact on your life. A high credit score can help if you want to buy a house or a car, but a low credit score could make it more challenging to get a job or rent an apartment. Even if you are growing your healthy financial habits, like paying off your credit cards in full each month, you may still be making these common flubs that can negatively impact your credit score. Managing your credit score is often not a straightforward process, but the more you know about the common mistakes, the better chance you have of avoiding them.
1. Ignoring your credit score
You might think you don’t need to check your credit score, that it’s just growing in the background. But even if you do absolutely everything right, it’s still possible for your credit report to have mistakes that could be lowering your score. If this is the case, you’ll have to work with the credit bureau to fix the issue. If you plan to make a major purchase in the next few months, like a house or car, checking your score now could give you time to remedy any errors. If you’re hesitant to check your score because you’ve heard checking it may cause it to drop, you should know that you can get one free credit report from each of the three major credit bureaus every year. In addition, One customers get ongoing access to their credit score along with personalized insights.
2. Maxing out credit card limits
Another factor that can impact your credit score is your “credit utilization ratio,” which measures how much of your available credit you use—the lower your credit utilization ratio, the better. For example, if you have a credit limit of $5,000 and $2,500 on your credit cards, you have a 50% credit utilization ratio (you’re using 50% of your available credit). However, if your friend also has $2,500 on their credit card but has a limit of $10,000, they only have a credit utilization ratio of 25% (they’re only using 25% of their available credit). If your score is pulled while your credit card balance is high and you haven’t yet made your payment, you can end up with a higher credit utilization ratio and, therefore, a lower credit score. CUR is an especially easy mistake to make since it can apply even if you pay your cards off in full every month.
2. Opening retail or department store credit cards
We’ve all been there, you’re checking out at a department store, and the cashier mentions how much you could save by opening a retail credit card with them. You know that having a higher credit limit can lower your credit utilization ratio (mentioned above), and you can save money on your purchase. It can sound like a win-win, which is why it’s such an easy mistake to make. While retail credit cards aren’t inherently wrong, spontaneously signing up for one to save a few dollars usually isn’t the best idea. First, a new credit card can lower your credit score because they will be processing a hard credit inquiry.
Secondly, it may encourage you to spend more than you can afford. Finally, the card may have a high interest rate and an annual fee. Therefore, if you decide to open a retail credit card, make sure you do your homework first so you don’t end up negatively impacting your credit score.
4. Having little to no credit diversity
Credit diversity refers to the different types of debt you have, for example, student loans, credit cards, a mortgage, car loans, etc. It may feel a bit counterintuitive—doesn’t more debt impact your credit score negatively? Not exactly. Credit diversity is about the type of debt more than the amount since credit companies like to see that you can manage various debts. Having little to no credit diversity doesn’t mean you should take out more loans purely to raise your credit score. Credit diversity ideally happens over time and is only one factor to consider when deciding whether or not to take on new debt.
5. Co-signing for a loan
If someone asks you to co-sign a loan, saying yes may feel like a good and generous response. But if the primary signer can’t pay back that loan, you’re on the line with them. You’ll be in financial hot water if you aren’t able or willing to cover the loan cost if they haven’t been making payments. Asking someone to co-sign is a big request, and if you are unsure of their financial ability to repay, it may be best for everyone you don’t co-sign.
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Katie is a tech and finance writer, covering stories from building better financial health to credit cards. They are currently based in Sacramento, CA with their puppy Ollie and cat Bagel.