6 Credit Score Mistakes You Must Avoid for Financial Success

Your credit score is a fundamental part of your personal finances, and can be a useful tool for building wealth.

It’s important to take care of your credit score and maintain a good credit history.

A good credit score can help you:

• Qualify for more loans & credit.

• Get lower interest rates.

• Save thousands over the long term.

But, a lot of people find themselves misusing their credit score, which hurts their chances of being able to get those three bullet points.

So, here are 6 credit score mistakes you need to avoid.

1. Cancelling Credit Cards

Building your credit score is as much about longevity as it is about paying your bills on time.

By cancelling credit cards, you’re reducing the time you’ve been building credit for, which can hurt your credit score.

It’s like building up no claims time on your car insurance.

The longer your no claims time is, the cheaper your insurance will be, because it shows insurance companies you’re a low risk driver.

Cancelling cards can also hurt your credit utilisation ratio, by reducing your overall credit limit, which can also hurt your score.

So, keep accounts open if it makes sense financially.

Sure, don’t leave accounts open with huge balances as you’ll drown in interest payments.

But, it’s important to think of time as a valuable asset when building credit, and consider leaving accounts open to help improve your credit score.

2. Using Credit Unnecessarily

There are several times in your life where borrowing money and taking out loans are essential:

• Student loans

• Mortgages

• Car loans

But where a large problem lies within society is the use of debt for things that you shouldn’t be using it for:

• New clothes

• A holiday

• New gadgets

It’s scary how accessible loans are nowadays, and you can easily find yourself in a position where you’re swamped, and can’t afford to pay it all back.

So, I have a simple rule of thumb:

Only use debt for necessities.

If there’s something you want to buy, only buy it with money you already have.

Can’t afford it? Can’t have it.

3. Making Late Payments

Making late payments on your credit card is one of the worst things you can do, and it must be avoided at all costs.

One of the main reasons for using a credit card, other than the convenience, is to boost your credit score.

If you’re missing payments… your credit score won’t improve.

It’ll worsen, and these late payments stay on your record for 7 years.

The longer your account stays in the red, the worse your credit score will become.

Reports from Experian have shown the amount of people who miss payments is increasing.

This is much to the liking of lenders, who profit off of these credit card mistakes.

You can ensure this isn’t you, by:

• Regularly checking your credit limit and balance.

• Making automatic payments so you don’t forget to make the payments.

• Build an emergency fund in case you find yourself short one month.

4. Applying For Too Many Credit Cards

Applying for too many credit cards at once can cause red flags to appear on your account, which isn’t good.

Lenders can view you as desperate, and in financial turmoil, which I’m sure isn’t true, but that’s how they’ll see it.

To avoid the mistake of looking desperate to borrow, imagine you have a limited amount of credit applications.

The general rule of thumb is to wait at least 3 months between applications, so you aren’t seen to be desperate for access to money.

By doing this, you won’t damage your credit score, and you’ll be much more attractive to lenders.

5. Ignoring Your Credit Score

A lot of people, including me, have this bad habit of ignoring things that we aren’t happy with.

This is all too common for things relating to our personal finances.

• Not saving money

• Poor spending habits

• Bad credit score

You name it.

Ignoring your credit score might help you avoid how bad it is.

But, if you really want to improve your credit score, you need to get out of the habit of ignoring it, and into the habit of making changes which will benefit your future self.

Find out your credit score using one of the three Credit Reference Agencies (Experian, TransUnion or Equifax) and start taking care of your finances.

Nothing good comes from ignoring a bad situation.

Nothing bad comes from taking action to turn it around.

6. Only Making Minimum Payments

Making minimum payments is better than paying late, or not paying at all.

But, if it’s financially viable, you should aim to pay off more than the minimum each month, so the interest on your account doesn’t accumulate to levels which can be hard to pay back.

Let’s use numbers to show why you want to reduce the amount of interest you pay:

Say you’ve got a card with a $1,000 balance and a 20% rate of interest.

Your minimum payment will be somewhere around $27–30 each month.

If you only pay the $27-$30 each month, it will take you slightly under 10 years to pay off the overall balance.

The bad news?

You’ll pay $1,056.74 in interest. On a $1,000 balance.

You’re essentially paying twice as much for the goods you bought in comparison to if you paid with your own money.

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