Ten Mistakes to Avoid When Trying to Improve Credit Scores

Ten Mistakes to Avoid When Trying to Improve Credit Scores

Don't damage your credit score further by rushing to do things that may intuitively make sense when trying to fix bad credit, but will actually negatively impact your credit score more. Let’s first look at what makes up one’s credit score, as developed by Fair Isaac:

The exact formulas for calculating credit scores are a closely guarded secret; however, Fair Isaac has reported the following components and the approximate weighted contribution of each as key factors:
35% - payment of credit accounts on time in the past (only includes payments later than 30 days past due)
30% - the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
15% - length of credit history
10% - types of credit used (installment, revolving, consumer finance)
10% - recent search for credit and/or amount of credit obtained recently

Mistake #1: Cancelling old credit cards. Remember, fifteen percent (15%) of your credit score comes from the age of your credit history. Therefore, cancelling your oldest credit card can often be a mistake. In addition, if you have balances on other credit cards, cancelling an old credit card that you don't use can impact your debt ratio, which makes up 30% of your score. If you don’t have other sources of credit that are older than seven years, do not cancel your oldest credit card.
Mistake #2: Paying “most” of your credit cards on time. 35% of your score depends on whether your payments were made on time (only payments that are more than thirty days late affect your score.) If you must be late on any card, make up that payment before it’s thirty days late. Don’t make the mistake to keep up with all but one or two of your cards and let those go later and later; instead, juggle the cards a bit if you have to, but make sure you are not too late on any one card.
Mistake #3: Requesting more credit than you need. 10% of your credit score comes from the types of credit used, so if you have a lot of open sources of revolving credit (i.e., credit cards), you may be seen as a credit risk because you have the potential of racking up a lot of debt very quickly. Don’t open store credit cards just to get a discount or other perk, and if you have any recently opened store cards, cancel them as soon as they’re paid off.
Mistake #4: Maxing out your cards. 30% of your score is developed from the ratio of your credit card debt to your credit limits. So, if all of your cards are maxed to their limit, your credit score will suffer even if you’re keeping up with the payments. Don't continue to charge and buy more and more on credit. Instead, focus on paying down the cards by making extra payments.
Mistake #5: Avoid taking loans and debts.When it comes to your credit report, no debt is effectively bad debt. If you’re a credit card avoider, you should consider getting one and making an occasional purchase with it - paying the balance on time. Some people use one credit card such as a card affiliated with their favorite gas station chain.They use it just for gas purchases, often racking up discounts on it, paying it off in full each month. This will help them maintain a solid credit score in case they need a loan in the future.
Mistake #6: Requesting a credit limit reduction. Many consumers believe that they have been granted too much credit and that they’re better off reducing their credit limits. The only significant effect a limit reduction has on your credit score is a negative effect on your debt ratio. Don't request a credit limit reduction unless it has a huge psychological value for you; otherwise, it will hurt your credit score.
Mistake #7: Using the first credit counseling service you hear about or find online. Very often, the ones that advertise the most are the ones that do the worst job. Use the FTC’s advice when searching for a reputable credit counseling service in your area. Call several of them and ask the questions from the FTC page to find ones that seem legitimate, then check with the Better Business Bureau before moving signing with one.
Mistake #8: Declaring bankruptcy. Too many people declare bankruptcy because they believe it’s the only way out. Before taking such a drastic measure, seek counseling first with one of the legitimate sources mentioned above. Bankruptcy can destroy your credit score for a very long time. Very often there are better solutions available to you, such as negotiating with creditors.
Mistake #9: Credit card arbitrage. Playing this game can seriously damage your credit score if you’re not an expert. Stay away ufrom this practice unless you’re financially stable and know exactly what you’re doing; if you make a mis-step, your credit score could easily be destroyed, and for a long time.
Mistake #10: Never checking your credit report. Most people who behave well with their credit just assume that their credit is fine, but sometimes errors can show up on your report. Visit annualcreditreport.com to get the free report that the United States government guarantees you from the three major agencies.

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