It’s totally normal to feel confused when you’re first trying to understand all the factors that impact your credit score. The good news is, raising your score is actually simpler than you might think. Understanding how your credit score works allows you to take control and start using credit to your advantage, which can help boost your financial confidence.
Here are five of the most common credit score mistakes people make, plus simple strategies to help you avoid them and keep your mind at ease.
- Maxing out a credit card
- Closing an old account
- Applying for too many things in a short amount of time
- Not using credit at all
- Only using one type of credit
1. Maxing out a credit card
Credit cards come with specific limits on how much you can spend with them, but that doesn’t mean it’s in your best interest to ever go near that limit.
How it affects your score: Your credit utilization ratio accounts for nearly one-third of your credit score. It’s influenced by the amount of credit that’s available to you in your revolving credit accounts—for example, the spending limit on your credit card. (A home equity line of credit is another example of a revolving credit account.) The closer you get to your credit limits on those accounts, like when you max out a credit card, the higher your credit utilization ratio gets, and the more it can hurt your score.
What you can do: Keep an eye on your statements and spending habits to ensure your credit utilization rate stays low. Although an occasional big purchase on a card can temporarily lower your credit score, your score should recover as soon as that purchase is paid off. And if you currently have high balances on your credit cards, keep in mind you can raise your credit score significantly by paying them off.
2. Closing an old account
Plenty of people have misused their credit card and decided they’re “done” with it—they’ll put it through the shredder and close their account. But this won’t help when it comes to raising your credit score, especially if it’s an account you’ve had open for several years.
How it affects your score: Another significant part of your credit score—15%—is determined by the average age of your credit accounts. The longer you maintain an account without missing a payment, the more it can benefit your score.
What you can do: Even if you decide to stop using a credit card, keeping the account open can be better for your credit score. Know this: Financial institutions can decide to close an account that’s not being used without warning the account holder. So if you stop using a credit card but want to avoid having the account closed, make a note to use the card for a small purchase here and there throughout the year—just remember to pay the bill each month so you don’t pay interest or fees!
If you’re not sure how many accounts you have open, you can get a free credit report at one (or all) of the credit bureaus on AnnualCreditReport.com. You’ll see the status of all your open credit lines.
3. Applying for too many things in a short amount of time
Sometimes people see their score drop when they apply for multiple credit cards or loans in a matter of weeks or months, which can send a red flag to lenders.
How it affects your score: When you submit an application for any type of credit—whether it’s a new card, a car loan, or a home mortgage—financial institutions will perform what’s called a “hard” credit inquiry to look at your credit history and make a decision on whether you qualify for what you’re applying for. A hard inquiry can stay on your credit report for about two years and may decrease your score by a few points, but you can regain those points over a matter of months with responsible credit management. Every situation is a little bit different, but when you have multiple hard inquiries in a short period of time, lenders may potentially see this as a sign that you’re struggling financially.
The portion of your credit score determined by the average age of your accounts comes into play again here. If you open up several new accounts in a short amount of time, it will send the average age of your accounts down.
What you can do: Plan out any significant credit applications you hope to make and wait at least a few months, if not longer, between each of them—and stay the course. If you’ve applied for several different loans or types of credit within the past year, try waiting at least six months. If you’re ever unsure, you can also try using a free credit monitoring tool to see whether a hard inquiry is still impacting your score.
Know also that hard credit inquiries are different than “soft” credit inquiries. When you’re just shopping around and prequalifying to see what kind of rate or offer you could get for a loan, that’s a soft inquiry that shouldn’t affect your score.
4. Not using credit at all
A good credit history not only helps you get approved whenever you do need to use credit, it can help you get the best terms possible, too—and lower interest rates mean more money saved. But some people are so wary of debt they avoid using credit altogether. What they don’t realize is that this can actually hurt more than it helps in the long run, because whether you’re buying a home, starting a business, repairing a roof, or co-signing student loans for a loved one, credit will most likely be needed for a major transaction at some point in your life.
How it affects your score: If you don’t use credit at all, you won’t have any credit history—but lenders need to see some credit history to be confident that you’ll be able to pay them back. Making consistent payments on time accounts for 35% of your score, while the age of your accounts makes up another 15%.
What you can do: If you’re looking for a simple strategy for raising your credit score, you may consider applying for a credit card that doesn’t come with any fees. The longer you maintain a credit card and never miss a payment, the more it will do for your credit history and score. Plus, if you pay off your balance in full each month, you’ll never pay interest on your card.
If you have trouble getting approved for the card you want, applying for and using a secured credit card responsibly can be a good way to start building credit. Secured credit cards don’t require high credit scores, but they come with lower credit limits and require a security deposit. The deposit gets returned to you after a certain amount of time as long as you use the card responsibly.
5. Only using one type of credit
While regularly using and paying off a credit card is a great way to raise your credit score, it shouldn’t be the only type of credit you use if you want a top-notch score.
How it affects your score: Your credit mix comprises 10% of your credit score, so it can actually help having an installment loan—like a mortgage, a personal loan, or an auto loan—in addition to a revolving account like a credit card.
What you can do: By having different types of debt and making consistent on-time payments, you’re showing potential lenders that you can manage loans without skipping a beat. This should raise your credit score and empower you to take more control of your finances.
Now that you know how to avoid these common credit mistakes, you can confidently continue building your credit score and history. A higher credit score can give you peace of mind that credit will be available to you if or when you need it—and that’s good for your financial confidence and well-being.