When it comes to credit, some people prefer the ignorant bliss method: Don’t look at your credit, don’t worry about your credit, don’t even think about your credit. This method can actually be quite effective for several months or even years — that is until you’re thinking about buying a new home, leasing a new car, financing a new computer, or whatever else you’ve been dreaming up.
When you’re actually looking for credit, it will quickly become clear that the ignorant bliss method was a mistake. Those financial decisions you carelessly made might actually hurt your FICO® Scores or credit history.
You don’t have to be the type of person that worries about credit constantly (although a periodic review of your FICO® Scores and credit reports is always a good idea). At the very least, you need to know how to avoid credit mistakes that might hurt your FICO Scores or good credit standing long term.
Here are 5 big credit mistakes you should avoid at all costs.
- Closing a credit card
Paying off a credit card that’s been carrying a balance feels fantastic. What better way to get closure than to close the credit card forever? Not so fast.
Two things to consider here: credit utilization ratio and credit history. Your FICO® Scores consider both. Your credit utilization ratio is the ratio of how much credit you are using compared to how much credit you have available to you. If you close a credit card, you have less credit available to you, thus making your credit utilization ratio higher and potentially impacting your FICO Scores.
FICO Scores and lenders both consider how long you’ve been using credit – both the average length of credit and total. If you’ve had this credit card for many years, closing it could have a negative impact on your credit history.
Solution: Keep your credit cards open, even if they’re paid off.
- Assuming your credit card company reports your $0 balance
A lot of people prefer to use their credit cards each month to gain rewards and then pay the balance in full before each statement closes. For some people, this is an effective way to manage credit.
However, don’t assume that your credit card company is reporting that $0 balance to the credit bureaus. Credit card companies can report your balance whenever they see fit, depending on their internal policies. So your credit card company might be reporting to the credit bureaus on the 15th of every month, but you don’t pay off your credit card until the 20th of the month. If you’re using a lot of your available credit, this could be hurting your FICO® Scores.
Your solution: Call your credit companies and ask when they report your account information to the credit bureaus. If they cannot disclose, order your credit reports for 2-3 months, review what information is being reported, and deduce what day of the month your credit card company is reporting. Even better, sign up for credit monitoring so you get alerted when your lender reports to the credit bureaus.
- Only having one type of credit
Data shows that, in general, consumers that have a varied credit profile are slightly less risky to lenders than consumers that only have one type of credit. So if you are relying only on credit cards or only on installment loans, consider opening up a different type of loan.
As always, we recommend you only apply for a loan or credit if you need it. But if you’re thinking about a major purchase in the next few years it might help to have a varied credit history.
- Using too much credit
Remember credit utilization ratio? We talked about it in number one. Some consumers don’t mind carrying a high balance on credit cards. It’s okay to carry a balance, but be careful you don’t let your credit utilization get too high. Experts recommend keeping your utilization at 10-30%. If it gets over 50%, it will likely have a noticeable impact on your FICO® Scores.
Solution: Ensure you’re paying more than your minimum payment each month, aiming to get or maintain lower credit utilization.
You don’t have to obsess over your credit habits to have good FICO® Scores and credit history, but you should be aware of how your spending impacts your scores. Head to our education center for a refresher course on what goes into your FICO Scores.