In a previous post, we discussed how your credit score is calculated and why good credit is so important: it’s the main factor in determining whether you qualify for a loan, what interest rates you get, and how much you pay in insurance premiums.
But life happens, and sometimes mistakes are made. Here are the absolute worst mistakes you can make when it comes to your credit.
Opening Too Many Accounts Too Quickly
While opening a new account can help improve your credit score, opening too many accounts in a short period of time can have the opposite effect. This is because lenders see this as a sign of financial instability and may be less likely to approve your loan application. So take your time when opening new accounts and only open them if necessary.
Not Paying Your Bills on Time
Late payments are one of the biggest factors when it comes to determining your credit score. Not only will late payments stay on your record for up to seven years, they also cause your credit score to drop significantly. To avoid this, be sure to set up automatic payments or reminders so that you don’t miss any due dates.
Maxing Out Your Credit Cards
The amount of available credit that you have makes up 30% of your overall credit score. This means that if you max out all of your cards, it could have a negative impact on your credit score. “Many credit experts say you should keep your credit utilization ratio — the percentage of your total credit that you use — below 30% to maintain a good or excellent credit score.”
Closing old accounts may seem like a good idea in order to reduce clutter and simplify things, but this can actually do more harm than good in terms of managing your finances and improving your credit score. This is because closing an account will reduce the total amount of available credit you have, which could lower your overall score by reducing the amount of debt-to-credit ratio (also known as utilization). So think twice before closing any accounts!
With the current economic climate, you might be relying more on credit than you have in the past. If things have changed and you need to revisit your financial goals, please reach out to make an appointment. If you’re looking to reduce your debt on your own, Investopedia recommends these software programs (CLICK HERE*).
*This link is provided as a service to you and will take you to a third-party site not affiliated with Lincoln Financial Securities. Lincoln Financial Securities is not responsible for the content and does not guarantee the accuracy of any information or material contained therein.
C Beach Brown, The Credit Mystery: How is my Credit Calculated? 7/20/2022
Nerdwallet, 30% Credit Utilization Rule: Truth or Myth? 4/27/2022
Investopedia, Best Debt Reduction Software Programs, 4/7/2022