Some mistakes are easier to recover from than others. Having to pay for a parking ticket may not be pleasant, but it shouldn’t set you back a huge amount of money. Forgetting about a homework assignment may hurt a little, but one negative score won’t usually impact your overall grade too badly. On the other hand, mishandling your credit could cost you thousands of dollars if your poor credit score prevents you from getting the best rates on a mortgage or auto loan.
No one’s perfect, but if your goal is to improve your credit health this year, you’ll want to avoid these major credit mistakes in order to build or better your credit in 2015 .
1. Missing a bill payment.
Want to kill your credit score? One of the best ways to do so is making a late payment. Since your credit score is meant to tell future lenders how likely you are to repay debts in a timely manner, your on-time payment percentage is an important factor. Just one missed payment could drop your score significantly.
Instead: Consider enrolling in auto bill pay (if possible), or develop a system that works for you. If you’re the forgetful type, set up calendar reminders for whenever a bill’s due date is approaching. As for me, I simply pay outstanding bills each month on payday. That way, I have a handy reminder and also know I have enough money in my account to pay everything off.
2. Maxing out your credit cards.
Maxing out your credit cards isn’t just bad for your bank account — lenders also care about how much you’re charging. Why? Someone who uses the maximum amount of credit they’re allowed to spend is much more likely to default on their payments than someone who uses a fraction of their credit limit.
Instead: Keep tabs on your utilization rate (calculate by dividing your credit balances by to your credit limits) and take action if it gets too high. In general, it’s best to keep your utilization rate between 1 and 20 percent if you can. To lower your utilization, try making payments more than once a month, asking for a credit limit increase or simply swiping your cards less — all of these are great ways to keep your balances at a healthy level.
3. Applying for too much credit.
Applying for a lot of credit can negatively impact you in a couple ways. First, each time you apply for a new credit account, the lender will most likely run your credit and add a hard inquiry to your report. While one or two hard inquiries may not impact your credit by much, several inquiries can send a red flag to future lenders and indicate that you’re either desperate for credit or not able to qualify for the credit you need. Secondly, more access to credit may tempt you to spend more money.
Instead: Limit your applications or wait until some inquiries fall off your report. If you need more credit and have a good relationship with your current lenders, it never hurts to try asking for a limit increase — the worst they can say is “no.” If you don’t need more credit, question whether the extra credit is worth the potential hit to your score.
4. Not using your credit cards.
Some consumers believe that not using their credit cards is a good habit because they won’t miss payments or spend money that’s not theirs. However, the reality is that lenders actually like seeing consumers responsibly use credit. You can’t prove that you’re a responsible borrower without borrowing money. In addition, if you don’t use your credit cards, your lenders may close your account, which could further hurt your score.
Instead: Try using your credit cards for small purchases you know you’ll be able to pay off. Not only will this keep your accounts open, but it’ll also help build up your positive payment history and show future lenders you consistently pay off debts on time.
5. Chasing rates.
Balance transfers are often great opportunities to save you money and pay down debt. However, opening those new accounts to transfer your balances can add hard inquiries to your report. The various fees can also add up quickly and actually increase your debt load. In addition, if you’re not able to pay off your transferred balance during the introductory period, you could end up with an even higher interest rate than you started with.
Instead: Do your research before applying for a balance transfer card, and avoid making repeated transfers. If you have debt, it may be more prudent to focus on creating a plan for paying it down completely instead of chasing the best rates.
The Bottom Line: Recovering from credit mistakes can be a long and frustrating process — in many cases, you’ll need to wait years for bad marks to fall off your report. However, by making conscious decisions to avoid these five mistakes, you should be able to keep your credit in tiptop shape.
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5 Credit Mistakes to Avoid in 2015 originally appeared on usnews.com
