One financial lesson my dad taught me was the importance of my credit score. He made it clear that without good credit, it would be difficult to get financing for school, a car, or a home. So from a young age, he instilled a strong sense of fiscal responsibility. Now thanks to him, I have become a financially independent adult and maintain my excellent credit score rating. However, I was unaware that some of my spending habits were working against me. You may not realize it, but there are many things you may be accidentally doing that are damaging your credit score. Here’s what you need to do to correct them if you are committing them as well.
7 Ways You Are Accidentally Damaging Your Credit Score
1. Not checking your credit report.
Ignorance of your financial situation is the biggest mistake you can make. Not taking the time to understand your finances or putting important decisions off until later is never the solution. Avoiding the issue won’t make it go away. Oftentimes, it will only make things worse. No matter how unpleasant it is, you should always be aware of your circumstances.
One way to do this is to check your credit report regularly. You can get a free one from each agency annually here. Your report will give you a detailed financial history and your credit score will be a good indication of your financial health. It will also inform you of any errors or damaging items on your credit report that can be removed. Monitoring your report can also prevent you from becoming a victim of fraud.
2. Applying for high-interest, in-store credit cards.
If you don’t know how credit works, you can quickly land yourself deep in debt. I know because I fell into the credit card trap. When I was in college, I racked up a lot of credit card debt during my first semester. I was naive and pulled in by attractive offers and discounts to sign up for credit cards at my favorite stores. However, I soon found myself paying off several high-interest credit cards and additional fees for the ones I forgot to pay off.
It was bad enough that I paid hundreds of dollars which I didn’t have to spare. But then, my credit card suffered another blow when I paid off the balances and closed the accounts. After a year of financial setbacks during my first year on my own, I learned to avoid these types of high-interest credit cards altogether.
3. Co-signing a loan for someone.
Another way you could be damaging your credit score is if you agree to co-sign a loan for someone. While you want to help people you care about, co-signing can be risky business since you are putting your finances on the line. If they miss a payment, not only will your credit score will suffer, but you will also be responsible for the full amount of the loan.
Even though you want to help someone out, you should carefully think through who you are legally binding yourself to. Are they trustworthy? Will they leave you holding the bag? If you trust the wrong person, it could ruin your finances and your future.
4. Closing credit accounts.
As I mentioned above, closing my unused credit accounts lowered my credit score. While it seems counterintuitive, it makes more sense when you understand the factors that affect your rate. In addition to the credit activity, the length of your credit history also affects your score. Generally speaking, the longer your history, the higher your credit score.
While you don’t want to have too many credit cards, you also don’t want to close them all. Keep your older accounts open, even if you don’t use them often. You can maintain the account with minimum purchases and boost your score by paying off your balances.
5. Defaulting on payments.
It can be difficult to keep up with your bills, especially if you have several monthly payments. However, defaulting on your payments is one of the most damaging factors to your credit score. Each time a creditor sends your bill to a collection agency, it puts a black mark on your credit report.
The good news is that they usually don’t turn it over until you have failed to pay far beyond the due date. This gives you time to work out a repayment schedule or settle with the lender before it is sent to collections. But you need to find ways to pay your bills on time, avoid the additional fees and penalties, and make sure you don’t take on more debt.
6. Limiting yourself to a single type of credit.
Although many people avoid using credit to stay out of debt, limiting yourself to a single type of credit can also damage your score. Credit is an important tool in building your future. So, taking steps to build your credit can help you when it is time to make large purchases and you need a loan. Using credit cards and smaller loans could get you better interest rates and terms when you need a car or home loan down the line. While it does come with a lot of personal responsibility over your spending habits, having access to multiple types of credit gives you options.
7. Avoiding credit altogether.
While credit should be respected, it isn’t something to fear. It may not always be the best source of financing, but it is an important avenue for many people to get money for the things they need like a car, a home, or their education. The truth is that many people land themselves in debt because they don’t know how to manage their credit cards and loans.
However, if you are responsible and can make your payments on time, it can be a valuable asset. I followed my dad’s advice as a teenager: start slow, learn how to use your credit to your advantage, and pay off your balances every month. And it has paid off for me. If you can build a strong credit history, you will become more attractive to lenders so you can get financing when you need it.
- Debunking These 15 Credit Score Myths
- What Is the Average Credit Score for Your Age?
- How often should I check my credit score?
Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.