Written by: Kristy Welsh
Credit repair information and credit repair misinformation is available on the Internet and even more bad advice can be had when listening to friends and family. One person says to do this and then another says to do that, when in actuality, you really have to look at your own situation and determine what credit repair tactics will work for you.
There may be some financial moves you have made, or are going to make, that at first glance may seem harmless but in the long run can really do a number on your credit. You might not realize the significant fall-out to the following seemingly insignificant financial moves until it is too late. This article is meant to set the record straight and try to steer you in the right direction when is comes to repairing your credit. Here we touch on five of the most common mistakes people make when fixing their credit which leads to lowering their credit score.
Keeping a Zero Balance
I know we beat it into your head that you should be paying off your debts, but, paying off a credit card completely every month does not help your credit score - it doesn't hurt it either. When you pay off your card and have a zero balance on this line of credit, it does not factor into your credit utilization ratio. This ratio is the percentage of your credit limit that is being used and factors into 30 percent of your credit score. Here is how to calculate your credit utilization ratio:
Locate your credit balance and credit limit on your last billing statement.
Divide the credit card balance by the credit card limit.
Multiply that number by 100. The lower this number, the better.
Leaving a small balance on your card each month will help to increase your credit score. Oddly, your credit score can actually drop when you bring a card balance down to zero. Go figure!
Keeping a High Balance
Now on the other side of the spectrum, having high balances on your credit cards is not good for your score either. As we mentioned already, the amount you owe on your accounts determines about 30 percent of your credit score. Lenders consider those who use a low percentage of their credit, say around 35 percent or less, to be a low credit risk. And being a low credit risk means getting lower interest rates on your loans.
Spending 80 to 90 percent of your available credit limit will negatively affect your credit score. As we saw in the calculations above, having a high credit card balance will equate to having a higher credit utilization ratio which will lower your credit score. Moral of the story, keep you balances low but not at zero.
Negotiate a Lower Annual Percentage Rate
Negotiating a lower annual percentage rate on your credit card may seem like a smart move for cutting expenses and boosting your savings account, but when you do, ensure that your creditor doesn't reduce your credit limit. If that happens, it could affect your credit utilization ratio and lead to a drop in points.
Closing a Credit Card Account
If you've scrimped and struggled to pay off a card, your initial reaction may be to cut up the plastic and close the account. Resist the urge. Various factors are taken into account when calculating your creditworthiness, and 15 percent of your score is determined by the length of your credit history. By closing an account, especially an older one, you shorten your credit history. The more established accounts you have, the higher your credit score.
Credit card companies also look at how much of your available credit you are using, i.e. your credit utilization rate. As we mentioned before, they like to see 35 percent or less of your credit in use at any one time. Paying off a credit card and leaving it open improves your utilization score, but closing it could do just the opposite.
Applying for New Credit
We are not saying to never apply for new credit, just make sure to do so very gingerly. Every time you apply for a new credit card, car loan, or cell phone plan, someone is going to pull your credit. This credit inquiry constitutes a "hard inquiry" which is likely to ding your credit score.
So, if you are looking for a good interest rate, which means you are rate shopping, make sure every lender you visit is not pulling your credit first. Make your final decision BEFORE having your credit pulled by the lender so that way there will only be one hard inquiry on your credit report.
It may seem like maintaining a good credit score is hopeless, but there are ideals you can strive for to achieve a good credit rating. Naturally, some of the above mentioned transactions are easier to avoid than others. By knowing the threat they pose to your credit, you can better understand when these moves really make sense. To sum it up:
Keeping these five common mistakes in mind while you are repairing your credit, will save you lots of anguish down the road. There is nothing more frustrating than thinking you are doing the right things when in actuality, it is hurting your credit score.
Aaron Crowe - https://bettercreditblog.org
Sometimes it’s the little things in life that can make all the difference.
A small ding to your credit score can drop it just enough from being in the excellent credit score range to the good score range. That can be enough to cause lenders to charge you higher interest rates, costing you money that you might otherwise save without the small nick on your credit score.
Inquiries, or new credit, account for about 10 percent of a FICO credit score. While that isn’t much when compared to payment history accounting for 35 percent of a FICO score, a credit score drop of up to 10 percent for having too many lenders look at your credit score can be enough to cost you real money in the long run.
There are two types of inquiries — hard and soft — and the first will hurt a credit score and the latter won’t. Knowing the difference can help you know when to act so that an inquiry doesn’t hurt your score, or when you don’t have to worry about it.
Hard inquiry defined
An example of a hard hard inquiry is when you apply for a credit card and the issuer “pulls” your credit report from one of the three major credit bureaus.
The hard inquiry may lower your score up to five points, depending on the rest of your credit profile. Going months between credit inquiries can have less of an impact than having a bunch at the same time.
Applying for a mortgage is another hard inquiry. The FICO score allows mortgage rate shopping, so applying with four different mortgage lenders in 45 days is counted as only one hard inquiry.
Hard inquires stay on a credit report for two years, but the FICO score ignores them after 12 months. Whatever your credit score, potential lenders will look at you as risky if you have too many inquiries over a short period. For people with a short credit history, this can be especially troublesome.
What’s a soft inquiry?
Soft inquiries come in many forms, and none should hurt a credit score.
Checking your own credit report is a soft inquiry. It doesn’t lower your credit score, as some people think it does, and in fact is a good thing to do to make sure your score is good and the information on your credit report is accurate. Consumers can check their credit reports for free once a year from each of the three major credit bureaus.
Creditors you already work with may do soft inquiries by checking your credit report to see if you’re still creditworthy. Credit card companies do this monthly.
If you get preapproved credit card offers in the mail, those are soft inquiries that don’t affect your score.
If you’ve given a potential employer permission to view your credit report as part of a background check, it’s also a soft inquiry that doesn’t affect a credit score.
What you can do
If you want to avoid a hard credit inquiry that could cause your credit score to drop, the simple solution is to not apply for new credit. But that isn’t always practical, such as if you want to find a better credit card or want to buy a home or car.
There are some money management steps you can take, however.
Start by not applying for credit cards that you know you won’t qualify for. Knowing where your score is on the credit score range can help you decide if applying for a card with some of the best travel rewards, for example, is worthwhile since many such cards require having excellent credit. Applying for a credit card that you probably won’t be approved for results in a hard inquiry and a rejection, which can also hurt your score.
Some credit card issuers target people with bad credit. If that’s you, be sure to read the fine print and make sure it’s a card you can live with. It may not have all of the features you want, but over time and by paying the bill on time, you can improve your credit score and move up to a better credit card.
These issuers may advertise that they won’t run a hard credit check and will base their decision on other factors, such as your income and employment history.
If you have good or excellent credit, a hard inquiry shouldn’t have much of an impact, if any, on your credit score. Keep your score high by paying your bills on time, don’t use more than 30 percent of the credit available to you, and have a good mix of credit.
When checking your credit score, look for errors and dispute them with the credit bureaus. Your vigilance should pay off with a better credit score and eventually should get you better credit terms. With that, a hard credit inquiry won’t hurt so much, if at all.
Your credit report is a snapshot of your payment history for all credit transactions that you have from age 18 until now. It details when you applied for credit, how many positive and negative accounts you have, who viewed your credit report, and all your personal information. Reviewing your credit report every four to six months gives you a chance to check for identity theft, inaccurate accounts, and incorrect information. It allows you to manage your financial situation before applying for a credit card, auto loan, bank loan, mortgage loan, employment, or insurance. For example, if you check your credit and notice that there are a few negative items on your report, you will have a chance to fix those items before applying for credit. By doing this, you avoid embarrassment and several inquiries, which lowers your credit score.