It's important to understand the factors that determine your credit score. Here's the good news: Raising your score is actually simpler than most people think. Once you understand how it works, you can take control and use credit to your advantage. Here are five of the most common credit score mistakes people make, plus simple strategies to avoid them.
1. Maxing out a credit card
Credit cards give you a specific limit on how much you can spend with them, but that doesn't mean it's in your best interest to ever hit that limit.
Your credit utilization ratio accounts for nearly a third of your credit score. It's influenced by the amount of credit that's available to you in your revolving credit accounts, like a credit card or home equity line of credit. The closer you get to your credit limits on those accounts (like when you max out a credit card), the higher your credit utilization ratio gets, and the more it can hurt your score. Keeping your credit utilization rate low, on the other hand, is great for raising your credit score.
2. Closing an old account
Another part of your credit score—15%—is determined by the average age of your credit accounts. The longer you maintain an account, the more it can benefit your score.
Plenty of people have misused their credit card and decided they're "done" with it—they'll put it through the shredder and close their account. But this won't help when it comes to raising your credit score, especially if it's an account you've had open for several years. Even if you decide to stop using a credit card, it's better for your score to keep the account open.
Keep in mind, financial institutions can decide to close an account that's not being used without warning the account holder. If you stop using a credit card but want to avoid this, try using the card for small purchases here and there throughout the year—but remember to pay the bill each month so you don't pay interest or fees!
Bonus Tip: Get a free credit report at one (or all) of the credit bureaus on AnnualCreditReport.com(opens in a new tab). You'll see the status of all your open credit lines.
3. Applying for too many things in a short amount of time
When you apply for any type of credit—whether it's a new card, a car loan or a home mortgage—financial institutions will perform what's called a "hard" credit inquiry to look at your credit history and make a decision on what you're applying for. A hard inquiry can stay on your credit report for about 2 years and may decrease your score by a few points, but you can regain those points over a matter of months with responsible credit management.
What gets some people into trouble is applying for too many different cards or loans in a matter of weeks or even months, which sends a red flag to lenders and could result in a significant negative impact on your score. It's best to plan out any significant credit applications you hope to make and wait at least a few months—if not longer—between each of them.
The portion of your credit score determined by the average age of your accounts comes into play again here, too. If you open up several new accounts in a short amount of time, it will send the average age of your accounts down.
Bonus Tip: Hard inquiries are different than soft inquiries. When you're prequalifying to see what kind of rate or offer you could get for a loan, that's a soft inquiry that shouldn't affect your score. Hard inquiries occur when you actually submit an application for something that requires payments, whether that's a loan, line of credit or a lease for a new apartment.
4. Not using credit at all
Some people are so wary of debt, they avoid using credit altogether. What they don't realize is that this can actually hurt more than it helps in the long run. Whether you're buying a home, starting a business, repairing a roof or co-signing student loans for your kids, credit will most likely be needed for a major transaction at some point in your life. If you don't use credit at all, you won't have any credit history. And with no credit history, you're not going to get the best terms possible and may even have trouble getting approved. This can really come back to bite you if you end up needing credit one day.
If you're looking for a simple strategy for raising your credit score, you may consider applying for a BB&T credit card. Making consistent payments on time accounts for 35% of your score, while the age of your accounts makes up another 15%. The longer you maintain a credit card and never miss a payment, the better it will do for your credit history and score. Plus, if you pay off your balance in full each month, you'll never pay interest on your card.
5. Only using one type of credit
While regularly using and paying off a credit card is a great way to raise your credit score, it shouldn't be the only type of credit you ever use if you want an excellent score. Your credit mix comprises 10% of your credit score, so it can actually help to have an installment loan—like a mortgage, a personal loan or an auto loan—in addition to a revolving account like a credit card. By having different types of debt and making consistent on-time payments, you're showing potential lenders that you can manage loans without skipping a beat.
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