Your credit score is one of the essential indicators of your overall financial health. Therefore, it’s vital to develop good credit habits to build your credit score.
To make that possible, you need to avoid some financial mistakes that may stifle your progress and may even harm your credit score for years to come. Be on the lookout for the following financial mistakes:
1. Neglecting Debts and Loans
Not all debts are bad. In fact, when done right, debts can boost your credit score. It’s a helpful way to acquire properties, buy a new car, or pay for medical bills. However, outstanding debts, like ones you haven’t paid for in a long time, might get sent to a collections agency.
By all means, avoid having your debt handled by a debt collector or agency. Debt collectors like the CBE Group are most likely damaging your credit score. Some agencies are known to resort to threatening letters and calls when trying to collect from you.
For peace of mind, and a better credit score, make sure to attend to all your debts promptly. Remember that your payment history accounts for one-third of your credit score.
2. Making Minimum Payments Only
One of the financial mistakes you should avoid when building your credit score is only paying the minimum amount due on your credit cards. Sometimes, the amount you owe incurs interests that may cost you more money over time than paying your debt off every month. If you’re not careful, it may also affect your credit.
The reason behind it is that as you make the minimum payment monthly, you’ll end up carrying a high balance on your credit cards. This can boost your credit utilization ratio, which is the percentage of the available credit you’re using.
How much you owe is also another essential factor in your credit score. Thus, a high utilization rate may cause damage once left unchecked. The best solution to build your credit score is to pay down your balances to ensure they stay under 30% utilization.
3. Not Having A Budget
An excellent way to keep your regular spending in check is to have a budget. It’s essential when creating a long-term financial plan, especially when building your credit score. Also, a budget can help you live a lifestyle you can afford and reach your financial goals in no time. To help you budget with ease, you can use various basic budgeting apps or other investment tools available online.
4. Signing Up For Different New Credit Cards
Another financial mistake that most people make is signing up for many cards at once to improve their credit fast. However, it’s never a good idea and can be a risky practice because the more credit cards you have, the harder you’ll be able to keep up with your monthly payments.
If you open up new credit cards and put purchases on those cards, you’ll need more payments to juggle. Moreover, every time you apply for credit cards, an inquiry is added to your credit report, decreasing your overall score.
5. Using Credit Cards Only
Unlike what most people think, credit bureaus don’t want to see revolving credit from credit cards only. They also want to see diversity because it allows credit bureaus to know that they can handle various credit under different terms.
When building a credit score, try finding other ways to establish your creditworthiness responsibly. Purchase from retailers that offer financing options, open debit cards that help you build credit, or report your rent payments to the bureaus. With a diverse portfolio of credit lines, you’ll be able to build your credit score effectively.
6. Canceling Your Old Credit Accounts
Even if you’re tempted to rid yourself of old credit cards, you might want to keep them rather than get new ones. The length of your credit history is one of the factors on which your credit score is based. Older credits paid well can make a difference to your credit history.
So, hang onto your oldest credit cards. Just make sure to evaluate what it’s costing you in interest and annual fees. However, if you have a good standing credit line and aren’t costing you anything, you might want to hold onto it.
7. Using Too Much Credit
Never use every ounce of credit you have if you want to build a good credit score. It shows maturity and discipline when you have a credit line, and you’re constantly charging less than the maximum allowed.
Even if you’re paying off your lines of credit and cards every month, you might be getting dinged for using too much of it. So, consider the credit available to you and try using less to prevent your credit score from going down.
It may take years to build your credit score. While it may sound daunting, it may help avoid various financial mistakes, such as making late payments, signing up for multiple credit cards, spending more than you can afford, and using only credit cards. The more quickly you avoid such mistakes and develop good habits, it’ll be much easier to develop a good credit score in the long run.