April 23, 2015
Common Mistakes that Lead to Poor Credit
Repairing your credit score can be tough. For many people, that difficulty is made worse by the fact that they don’t really know what contributes to bad credit in the first place. While most people understand the basics of what helps and hurts their credit score, there are several common mistakes people make every day that can make credit repair much harder.
At The KEY, we work with Oklahoma City used car shoppers who need help improving their credit all the time. Knowing these simple mistakes and how to avoid them can make it easier for you to repair your poor credit score and get your finances back on track.
Mistake 1: Closing Old Debt
One of the major factors credit bureaus use to calculate your credit score is the age of your line of credit. In general, older lines of credit that have been open for longer carry more weight and help your credit score. In other words, it can actually be detrimental to your credit score to cancel or close out old debt.
Here’s an example: Imagine you have two credit cards, one that is five years old with a $1,500 balance and one that is one year old with a $1,000 balance. You get your tax refund back and decide to use it to pay off a card. In most cases, it would be better for you to pay off the newer card first, even though the older card has a higher balance. That’s because the older card carries more weight for your total credit score. Clearing that debt and cancelling the account removes it from your credit score calculations, lowering your overall score.
Mistake 2: Maxing Out
Another thing that can hurt your credit score is approaching the maximum limit of your debt. For instance, if you have an open credit card and you spend almost the entire balance, that can hurt your credit score significantly. Credit bureaus see that you’re almost to your limit when it comes to credit, and they get shy about offering you more loans. Approaching your limit can look like a sign of financial instability, and the bureaus are all about minimizing their own risk.
What can you do to avoid this? Simple – avoid maxing out lines of credit. If you know your credit card is close to the limit, put it away for a little while and focus on paying down some of the debt. If there’s something you absolutely have to buy – a new part for your car, for instance – you should try to spread the purchase between several cards or accounts so you don’t raise the balance on any one of them too far.
Mistake 3: Intentionally Skipping Payments
When your debt outpaces your income, you know how hard it can be to keep up with your bills. Car payments, rent, utility bills, and credit card payments can be overwhelming, especially if you know you don’t have enough money to cover it all. This kind of situation can lead to a very common but very big credit mistake: prioritizing one debt over another and only paying some of your bills while intentionally missing a payment on your “low-priority” debt.
Unfortunately, creditors and credit bureaus don’t see your debt the same way. To them, all debts are equal, and you have an equal obligation to pay your minimum payment every month no matter what. To avoid this mistake, that’s exactly what you must do – pay at least your minimum payment every month for every bill. Skipping a payment can lead to a big ding in your credit score that you’ll be recovering from for a long time.
Additionally, you might think it’s OK to wait until your next paycheck and only miss the payment date by a day or two. However, some creditors will notify credit bureaus about a missed payment the day after you miss it, and the bureaus will lower your score even if you never got a late payment notice. Do your best to stay on top of your bills and pay them ahead of time to avoid problems.
Mistake 4: Avoiding Credit
With all these mistakes and problems, you might think it’s better to just avoid taking out credit lines and save your money. However, avoiding credit altogether can lead to the problem of having little credit history, which in turn can lead to higher interest rates or poor terms when you do need to take out a loan. Someone who has never had a credit card or finance payment will have a much harder time getting a reasonable mortgage, for instance, or buying a new car.
The reason for this is that credit bureaus look at your credit score and credit history as a measure of how dependable you are. If you have very little or no credit history, they can’t assess how risky it would be to lend money to you. That leads creditors to protect their risk by assessing higher interest rates or poor terms overall.
There are several ways to build credit over time if you don’t have any previous credit history. Secured credit cards are a popular choice, since they make it impossible for you to go over your limit. You can also take out a loan for a used car – the amount of the loan will be lower than on a new car, so with diligence you’ll be able to pay it off faster.
Mistake 5: Not Checking Your Credit Report
One final mistake we see too often is people who don’t really know what their credit score is or what their credit report says about them. It’s not uncommon for people to find mistakes on their credit report that are lowering their credit scores – mistakes such as accounts that are actually closed being listed as open, or incorrect payment amounts for loans and credit cards.
Mistakes like these are usually pretty easy to correct, and clearing them up can give your credit score a noticeable boost. Take a look at our recent blog post about finding and fixing mistakes on your credit report for more information.
Rebuilding your credit after making mistakes on your report can take time. At The KEY, we help car shoppers get a quality used car in Oklahoma City even when they have poor or little credit, so you can get your life back on course faster. Call our Oklahoma City used car dealership today to find out how you can get approved for a late-model used car in less than two minutes, or visit our Facebook and Google+ pages for more tips on buying used cars and repairing your credit.