It’s easy to think of a credit score as a black box. You know how high or low you are, but what exactly goes into that number isn’t always clear. As you might imagine, there are plenty of factors that can hurt your credit score—and even more that can help it improve. Here are seven common mistakes people make in their quest to boost their scores:
1. Carrying A Balance
You’re always better off paying your balance in full each month. That way, there is no interest to pay and the total amount you owe stays the same. But if you do carry a balance, don’t forget about those interest charges.
Carrying a balance will make it difficult for you to save money because any extra cash is going toward paying down debt instead of being put into savings or investments where it could grow over time. And if you’re carrying credit card debt from one month to another with no end in sight (or worse yet, racking up more debt), chances are pretty good that eventually this will hurt your credit score as well.
2. Late payments
Your credit score is a number that lenders use to determine how risky it is to lend you money. It’s based on your payment history, amount owed, length of credit history and types of credit used.
Late payments can affect your credit score in several ways:
- They can cause you to pay higher interest rates or fees on loans or credit cards.
- They can lead to late fees that ding your wallet every month.
- If you don’t follow through with making good on the late payments, this could result in the loss of access to all kinds of products such as cars and homes (depending on what kind of loan or lease terms were violated).
3. Settling for too little
If you’re in a situation where you can’t pay your debt, start by contacting your creditor. Negotiating with them is usually easier than it sounds, and there are plenty of ways to get them to agree to less than what’s owed:
Ask for a payment schedule that works for both parties. Your creditor could agree to lower monthly payments if you pay off the balance quicker or let them take payments from another account of yours.
Try offering collateral (a car title or home deed) as an incentive for extra payments each month. This won’t work if you’re already upside down on your loan, though—the bank will just sell off the property so they can recoup their losses!
A personal note explaining why this situation happened and how it will be resolved can go a long way towards helping the creditor understand your side of things: In other words, don’t try talking yourself out of paying back money you owe; instead focus on how paying it back will benefit everyone involved in the long run.
4. Cash advances
Cash advances are expensive. The interest on cash advances is generally higher than the interest on credit cards, and can be as high as 35% or more. In addition to the exorbitant rates, you’ll face additional fees for using a cash advance.
If your balance isn’t paid in full within 60 days of taking out your original loan, any remaining amount will be subject to interest charges and other penalties at an even higher rate than what was charged when the loan was issued.
5. Not reading the terms of your credit cards
If you’ve been a cardholder for years, it’s tempting to think that you know all the ins and outs of your credit card agreement by heart. But reading through the fine print is important—and not just because there are often hidden fees (like interest rate hikes) that can hit you unexpectedly if you don’t know what they are.
The language in these contracts can be confusing and vague, which means they’re open to interpretation. And when it comes to interpreting contracts, most judges will look at how reasonable you were in your actions based on what you knew at the time. The judges won´t consider how reasonable your actions would have been if only you’d known better or had better luck understanding their responsibilities as a borrower!
If there’s something about a contract that makes even little sense to you, ask someone who knows more about it than you do (like an attorney or accountant) before signing anything.
6. Paying only the minimum monthly payment
Paying only the minimum monthly payment on your credit card can hurt your credit score. The reason is that, if you don’t pay down your balance, it will continue to grow. That means that you’re going to pay more total interest over time.
There are two ways to avoid this. One is to increase your monthly payments so that they’re higher than the required minimum payment. This will allow you to pay down your debt faster and save money on interest charges.
The other option is to transfer any balances from high-interest cards onto a low-interest one (if possible). You can also look for cards with variable rates or introductory offers that offer lower rates for initial periods of time.
7. Closed credit accounts and negative information on your credit report
If you have closed credit accounts, or negative information on your credit report, it could be hurting your credit score. Here’s why:
Closed accounts: When you close a credit account, it will stay on your credit report for up to 10 years. The length of time that an account stays on your report depends on the type of account and how long ago it was opened.
For instance, most mortgage loans and auto loans will remain on your report for seven years after they’re paid off. Credit cards can remain for up to 10 years after they’re closed.
Negative information: Negative information in your credit report includes late payments, collections accounts and judgments. These items can stay on your credit report for up to seven years; however, if you make consistent payments on time every month, these negative items will eventually fall off.
If you can avoid these credit landmines, and stick to a good money management plan, your credit score will likely improve. You could pay less for loans and insurance policies, and even move into a nicer apartment or house. Money management is a smart skill for young adults, so we encourage you to read about the topic online and learn as much as possible. We hope that our article helps you make smart decisions with your finances.