13 Common Credit Mistakes and How to Avoid Them
Caitlyn is a freelance writer from the Cincinnati area with clients ranging from digital marketing agencies, insurance/finance companies, and healthcare organizations to travel and technology blogs. She loves reading, traveling, and camping—and hanging with her dogs Coco and Hamilton.Read full bio
At a Glance
Even the most well-intentioned borrowers can accidentally harm their credit with simple mistakes. There are, in fact, seemingly small credit mistakes you can make that can actually have a direct or significant impact on your credit score, and this can have impact beyond just getting approved for additional credit. Read on to learn more about the top credit mistakes, and tips for how to avoid them.
In this article, you’ll learn:
- Not checking your credit often
- Not paying your bills on time
- Paying only the minimum amount
- Applying for multiple credit cards together
- Taking on unnecessary credit
- Closing credit card accounts
- Opting for longer auto loan terms
- Unnecessary purchases on credit
- Buying items for “good deals”
- Focusing on many debts at once
- Maxing out your credit card
- Co-signing a loan
- Asking for a credit limit increase
Not checking your credit often
The Mistake: This is one of the biggest mistakes you can make for a number of reasons. First, it’s important to check your credit reports regularly (from Experian, Equifax, and TransUnion) to find and fix any credit report errors that could damage your score.
Second, if you plan to apply for any loan or credit in the near future, keeping an eye on your score can help you know if you need to take steps to improve it to get better interest rates and terms.
The Fix: Get access to all three credit reports once a year for free at AnnualCreditReport.com. When you get the report, review it for any errors or mistakes and contact the credit bureau right away if you find any to file a dispute. Additionally, many credit cards and banks give customers access to their credit score for free, so take advantage of that benefit and check it at least once per month to monitor and make any necessary adjustments.
Not paying your bills on time
The Mistake: This is one of the second biggest mistakes you can make because your payment history makes up 30% of your credit score. Missing even one payment can have a huge effect on your score, though late payments are only reported if you’re late by 30 days or more.
If you do have a late payment, it will remain on your credit report for seven years, which can keep your score from rebounding for a longer period of time.
The Fix: Request payment reminders from your lenders, most of which are provided via email, text, or push notification. Or, set up autopay through your lender or bank account so that payments are made automatically and you’ll never miss one. (If you do this, make sure you have enough money in your account to cover your bills.)
Paying only the minimum amount
The Mistake: Paying only the minimum amount on your credit card each month means you’re also carrying a balance from month to month. Not only will you be charged interest on that balance, owing more money in the long term, it can also damage your credit.
It’s possible that the balance you carry each month is high, which increases your credit utilization ratio. The total amount of your debt also plays a role in your credit score, so having a high balance and high rate can both damage your score.
The Fix: Try to pay off your cards in full each month. If that’s not possible, pay as much as you can. It’s important to keep your credit utilization ratio below 30%, but if you have a large amount of debt that feels out of control, consider using the debt snowball method or avalanche method to pay down the balances.
Learn more: Will Making the Minimum Payment Hurt Your Credit Score?
Applying for multiple credit cards together
The Mistake: It’s not bad to have multiple credit cards if you’re using them responsibly and repaying them in full each month. However, each time you apply for a card, the issuer runs a hard credit inquiry to check your credit report. Having only one credit inquiry only hurts your score by a few points, but multiple inquiries in a short period of time can have a compounding effect, causing issuers to view you as a riskier borrower.
The Fix: First, do your research before applying for a card to make sure you meet the requirements. Only apply for a card that you’re likely to be approved for so you don’t have to submit multiple applications.
If you want to have more than one card to take advantage of rewards, spread out the applications over a longer period of time to give your score time to rebound.
Learn more: Do More Credit Cards Help Your Credit Score?
Taking on unnecessary credit
The Mistake: Taking out student loans to pay for things like rent or applying for a personal loan for a vacation you could save for can all hurt more than just your credit.
Overall, having a large amount of debt (especially when unnecessary) can make it more challenging for you to make monthly payments, increasing the likelihood that you’ll miss a payment. It can also increase your credit utilization rate.
The Fix: Only apply for a loan when you really need it. Before applying, consider whether you can take some time to save to avoid the debt, or if there are other ways to pay for something. If you do take on credit, be sure to create a budget and plan for paying it back on time.
Closing credit card accounts
The Mistake: If you no longer use a credit card, or you’ve completely paid it off and no longer want the temptation of using it, you may consider closing the account. Unfortunately, this can actually hurt your credit score. Not only does it reduce the amount of credit you have available, but if you have a balance on other cards or debt, your credit utilization will then increase. It’s important to keep your utilization ratio as far below 30% as possible.
Additionally, if that credit card was open for longer than the rest of your accounts, you could decrease the age of your credit history. Plus, you no longer have the benefit of on time payments, which help your score.
Even if you close an account in good standing, it can remain on your credit report for up to 10 years.
The Fix: In many cases, it may be smarter and make more sense to keep the account active but to cut up and throw away the physical card. Or, use the card for one or two small purchases per month, such as using it to pay your utility bill, and then pay it off in full each month. This will help improve your payment history.
Opting for longer auto loan terms
The Mistake: The average financing term is about 72 months for new cars or 65 months for used cars. While a longer repayment term may seem like a good idea because you’ll have a lower monthly payment, you’ll end up paying more in interest over time, increasing the overall cost of the vehicle. And, your car could end up depreciating faster than you can pay off the debt, meaning you’d ultimately owe more than the car is worth.
Also keep in mind that your financial situation could change in the future, making it more difficult to make those payments.
The Fix: If you’re concerned about higher monthly payments with a shorter loan term, take advantage of ways you can lower how much you borrow, such as buying a less expensive vehicle, decreasing the cost of your vehicle by removing unnecessary add-ons, or putting more money down.
Unnecessary purchases on credit
The Mistake: It’s easy to use a credit card, swiping a piece of plastic instead of physically seeing money leave your hands. This makes it easy to overspend or make unnecessary purchases. However, similar to taking on unnecessary loans, making unnecessary purchases on your credit card can:
- Make it more difficult to pay off the debt each month, so you can accrue interest on the outstanding balance.
- Increase your credit utilization ratio.
- Decrease the amount of credit you have access to.
- Increases the chances of late payments.
The Fix: Try to only use your credit card if you have to. Ensure you have a plan for repayment each month – keep an eye on your bank accounts to ensure you have enough to pay for what you need. Consider using a debit card instead of a credit card, or using cash when possible.
Buying items for “good deals”
The Mistake: It’s tempting to purchase something because it seems like a “good deal,” and it happens to many of us even if we were never planning on purchasing that thing in the first place. Items on sale may seem like something you shouldn’t pass up, but oftentimes, the original price is inflated anyway.
The Fix: Before making a purchase, think about whether you really need the item. Will you be happy you bought it tomorrow? Or in a week, or month? Also think about the total amount you’d be spending instead of focusing on what you’d save. If you’re really tempted, go home and think about it overnight and if you still want it in the morning, you can go back.
Focusing on many debts at once
The Mistake: If you have multiple debts and/or outstanding credit card balances, it can quickly get overwhelming thinking about paying them all off. In fact, this can actually be a mistake, and you can quickly end up falling behind on them all instead of making progress paying them down.
The Fix: If you feel like you’re drowning in debt, try something like the debt snowball method, where you pay off the lowest-balance debts first, or the avalanche method, where you repay your highest-interest debts first. Create a budget and make a plan for repayment to avoid feeling overwhelmed.
Maxing out your credit card
The Mistake: Even though you have access to a certain amount of credit, that doesn’t mean you should use all of it. In fact, doing so can negatively affect your credit score even if you pay off the whole balance each month.
The reason is because the date your balance is reported to the credit bureaus and the date your monthly payment is due are different, so even if you plan to pay off the card, the credit bureaus will see a high credit utilization ratio and deem you at risk.
The Fix: The easiest fix is to ask your credit issuer when balances are reported to the credit bureaus. Then, pay off your balance a few days before that so that your utilization rate is low when it’s reported. Or, consider making a payment on your card every two weeks to keep your balance low throughout the entire billing cycle.
Co-signing a loan
The Mistake: Co-signing a loan means you’re agreeing to take responsibility for the debt if the borrower isn’t able to make payments. Even if you fully trust the person you’re helping, this can be risky because you’re tying your credit score and history to someone who may not be able to repay the debt. Missed payments can also hurt your credit, and ultimately, you may have to pay off the debt yourself.
The Fix: Think through co-signing a loan thoroughly. Make a plan beforehand with the borrower to ensure they will be able to make payments, and discuss what will happen if you have to make payments. Make sure they understand how this impacts your credit as well, and keep an open line of communication throughout the loan repayment process.
Asking for a credit limit increase
The Mistake: The second most important factor of your credit score is your credit utilization ratio, or how much debt you carry compared to how much you can borrow. If you have a high credit utilization rate, it may seem like a good idea to ask for a credit limit increase so you can have access to more funds.
However, when you do this, the bank or issuer will need to check your current financial situation and credit, which will trigger a hard credit inquiry and decrease your score by a few points.
The Fix: First, ask your lender or issuer how they treat a request for a credit limit increase. If you have an existing relationship with them, ask if they can grant an increase without pulling your credit. Additionally, showing financial borrowing and spending habits can trigger an automatic increase.
Making a late payment or missing a payment completely can have the biggest negative impact on your credit, though it’s only reported if you’re more than 30 days late. Your score could drop up to 100 points or more depending on how late you are.
Building credit takes time, but there are a few things you can do to make it go faster. First, make sure you’re paying all your bills on time. Consider adding to your credit mix or asking for higher credit limits, both of which can have long-term positive impact. Use a secured credit card, and get credit for rent and utility payments. Finally, review your credit report and dispute any errors or mistakes.
While there’s quite a list of things that do affect your credit, there are also a few things that don’t including: Using a debit card, getting married or divorced, having a credit application denied, getting help from a credit counselor, or a decrease in your salary.