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Five Credit Mistakes You Should Never Make

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Having good credit is necessary for much more than just when you need a loan. Many landlords check your credit before considering renting an apartment to you. Some employers might even go as far as looking at it to help them decide if they will hire you.

The best way to maintain a good credit score is to avoid these common mistakes. Let's talk about a good credit score, how to check your credit, and the five mistakes to avoid. Last, we'll cover how to correct a credit mistake.

What is a good credit score?

Your credit score represents your creditworthiness based on credit history, which records your past borrowing and repayment behavior. A higher score shows the likelihood of repayment. There are different scoring models, but the FICO score is between 300 to 850; a fabulous credit score is anything above 700.

Five factors that affect your credit score

Payment history: Think of this as your "bill-paying record". It includes how punctual you are when it comes to paying your bills and if you have any bankruptcies, foreclosures, or collections. This alone accounts for 35% of your total score. Lenders want to see that you've made all of your payments on time, and they'll look at your credit report to verify. If you have any late fees, it will hurt your score.

Credit utilization ratio: This is how much of your available credit you use. By reducing this number, you show lenders that you're not maxing out your credit cards and you can manage debt. Aim for a credit utilization below 30%.

Credit history: This is a record of your borrowing and repayment behavior over time. Lenders like to see a long credit history because it shows them you're a reliable borrower. Credit history accounts for 15% of your score.

Credit mix: This is the variety of credit you have, such as a mortgage, car loan, student loans, and credit cards. A credit mix shows lenders that you can handle different types of debt. It makes up 10% of your score.
New credit: This is any new credit you’ve taken, such as a new credit card or loan. New credit accounts for 10% of your score. Lenders need you to manage new debt responsibly.

Credit score ranges

Now that we’ve discussed the five factors that affect your credit score, let’s discuss what range you might fall into based on FICO standards. Here’s a breakdown of the FICO credit score ranges:
  • 800–850: Exceptional
  • 740–799: Very good
  • 670–739: Good
  • 580–669: Fair
  • 300–579: Poor
How to check your credit

To check your credit report, you can request a free annual copy from Review your credit history, and take this opportunity to make improvements or dispute incorrect information on your credit report.

Credit report

Your credit report is supposed to give you complete information about where you stand regarding credit history and debt. It includes information on your payment history, a list of credit accounts and limits, and types of accounts.

Where to check your credit score

You can check your credit score for free through several websites and apps, such as Credit Karma and Credit Sesame. Or you can sign up for a free trial of a paid credit-monitoring service like myFico. Your credit card company, financial institution, or loan provider may also provide your credit score for free.

Five credit mistakes to avoid

Let's talk about how to correct a credit mistake.

1. Paying your bill late

Late payments will likely stay on the account and hurt your credit score for years to come.
If you are struggling to make ends meet, contact your creditors and see if they can work with you. Many companies are willing to assist in payment plans or other relief options.

2. Borrowing more than 30% of your credit limit

Your credit utilization ratio—the amount of credit you're using compared to your credit limit—is the second-most crucial factor in your score. Keep your credit utilization below 30%, and, if you're regularly borrowing more than 30% of your credit limit, it's time to either pay down your debt or increase your credit limit.

3. Opening too many accounts at once

If you need to open a new account, space it over time and ensure to leverage all of your accounts responsibly. Opening multiple accounts alarm lenders that you're overextending yourself. It can also lower the average age of your credit history, which is a negative factor in your score.

4. Closing your oldest account

Closing your oldest credit card shortens your credit history, which is a negative factor in your score. It also increases the utilization ratio if you don't also reduce your debt. If you halt operations on an old credit card, consider leaving it open and using it sparingly to keep your credit history long and robust.

5. Not checking your credit report

You should check your credit report regularly for mistakes and ensure no fraudulent activity has occurred. Remember, you're eligible for a free credit report from the credit bureaus once per year.

Now you've learned how to correct a credit mistake, take advantage of these ideas and you'll be sure to maintain a good credit score. If you would like to learn more about your credit options, contact Power Financial Credit Union.