Having a credit score of at least 720 will give you a chance to secure some of the best financing options on the market, get preferred interest rates on loans and credit cards, and have more negotiating power when you’re talking terms with a prospective lender. Checking your credit score and credit report at least once a year can help you stay on track and take care of any errors, mistakes, or omissions before you apply for credit. A clean credit report can also provide some benefits when potential employers, cell-phone providers, and landlords want to check your credit history.
1. Maxing out credit cards. Even if you have a low-interest credit card and can realistically afford to make payments on a full balance, avoid the temptation to max out the card—or maintain a high balance. A percentage of your credit score is calculated on your available credit, so maxing out a card or maintaining a high balance can work against you. You can actually increase your credit score just by keeping the balance low.
2. Missing payments. Even a single missed payment can affect your credit score, so make sure you’re keeping tabs on due dates for your bills and make payments at least one week in advance. Take advantage of online bill-pay options that allow you to schedule payments or set up a recurring payment with a bank account. It can take several months to rebound after one or a few missed payments, so make every effort to stay ahead of the game. If you’re having trouble making the minimum payment on credit cards or loans, talk to the credit-card company or lender to negotiate terms or set up a new payment plan. Many will be willing to work with you to ensure that they at least get some payment on time. It’s your responsibility to make those payments on time each and every month, so don’t be afraid to reach out for help if you find yourself getting behind.
3. Applying for new credit. Applying for more credit cards, filling out a loan application, or doing anything that will trigger a hard inquiry on your credit report will drop your credit score by a few points. Avoid applying for multiple credit cards and loans over the course of a few months. This can raise some red flags for future lenders, as every hard inquiry will be listed on your credit report for two years. You don’t want to appear desperate for credit at any time, so really think about how much credit you need, how the application might impact your credit score, and what amount of credit you are comfortable with carrying at any given time.
4. Not using available credit. If you’ve become good at managing your finances on a cash-only basis, you may want to ditch credit cards for good. However, your credit score can drop once you’ve stopped using your credit cards and paid off all your loans. You want to keep your credit utilization ratio—another factor that determines your credit score—as low as possible, and you can do this by keeping a few credit cards active. Think about charging smaller purchases to a credit card and making sure you pay off that balance in full at the end of the month to improve your credit score and continue building credit.
5. Closing old accounts. It may feel satisfying to finally pay off those credit-card balances, but it’s generally not a good idea to close the account when that balance hits zero. Keep the credit line open and you’ll help your credit score in the process. Closing an old account will raise your credit utilization ratio and negatively impact your credit score. Just keep those credit lines open to increase your total available balance. Remember to keep at least one of those accounts active by making small purchases and paying off the balance by the end of the month to boost your credit score over time. Review your open lines of credit listed on your credit report at least once a year to make sure you’re on track.
For more help repairing your credit, check out Sabah Karimi’s financial blog on WiseBread.com.