Because so much depends on your credit record and credit score, you should be aware of the pitfalls that can tarnish your financial reputation. That's why FDIC Consumer News has compiled this list of common mistakes that can significantly affect your credit history and credit score.
1. Paying bills late. One of the biggest factors in the determination of your credit score is your past payment history. While one or two late payments on your mortgage, credit card or other important obligations over a long period of time may not significantly damage your credit record, if at all, making a habit of this can count against you.
Solution: Consistently pay your bills on time because this indicates you're a responsible money manager and likely to take your future commitments (such as a loan) seriously. Be especially careful with payments in the months before you apply for a loan, because lenders put more emphasis on your recent payment history.
2. Not paying the minimum amount required. "If you don't make at least the minimum payment on your credit card or other bills, your creditors will eventually report your account as past due, and that's a bad mark on your credit history," says Janet Kincaid, a Senior Consumer Affairs Officer with the FDIC. "Not only that, but paying less than the minimum can result in late fees and additional interest charges, which can add up quickly."
| Consistently pay your bills on time because this indicates you're a responsible money manager and likely to take your future commitments (such as a loan) seriously. |
Solution: Make the minimum payment to avoid negative reports. Pay more than the minimum to reduce interest charges and improve you credit score.
3. Keeping debt levels too high. Potential creditors will be concerned if there are indications you already owe a lot of money on credit cards and other obligations because additional debt could stretch your ability to repay. One way creditors evaluate whether to approve a loan or charge a higher interest rate (which is done to compensate for higher risk) is to look at how much you owe compared to your income. Creditors also consider how much of your credit card limit you typically use. If you are "maxing out" your credit cards or otherwise keeping a high balance in relation to your credit limit, a lender could question your ability to make payments on additional debt.
Solution: Different lenders and credit scoring services may use different calculations when evaluating you—for example, some may include your monthly mortgage payment in their debt-to-income ratio, others may not. So, in general, try to keep your debt level low. How? Don't spend more than you can afford. Don't max out or charge near the limit on your credit card. Also, if possible, try to pay off that credit card balance each month. Follow this strategy and you'll build a good credit history, reduce debts and save on interest payments, too.
4. Owning too many credit cards. You may not think twice about offers to "sign up today" for a credit card to receive a percentage off your first purchase, get a free T-shirt or to have no payments for six months. Depending on your personal situation, these promotions may be good deals. But beware. "If you open a number of credit accounts with retailers just to get the discounts or freebies, these seemingly harmless accounts may linger in your credit file and end up costing you money the next time you get a loan or insurance," warns David Lafleur, an FDIC Policy Analyst on consumer matters. Here's why.
If you have a stack of credit cards and department store cards—even if you rarely use them or don't carry a balance on them—each card represents money that you could borrow. According to the Kincaid, "A potential creditor will look at each card and its $10,000 or $20,000 credit limit and say, 'We don't know when or if you'll access this amount, but if you do, that means you'll have less money available to repay any new obligation'." The result could be that, if you apply for a mortgage, a car loan or some other important loan, you may qualify for only a smaller loan amount or perhaps face increased costs or fees.
Also, when you apply to a bank for a credit card or a loan, it will look at the "inquiries" section of your credit report to find out if you've recently applied for loans elsewhere. Several such inquiries on your credit report could indicate to a lender that you may be having financial troubles or that you could be on the verge of getting too deeply in debt. These inquiries remain on your credit report for two years and can be a factor in your credit score.
Solution: Don't own or apply for credit cards you really don't need. Two or three general-purpose cards and a few (if any) cards issued by stores or oil companies probably are enough for the average family. Cancel and cut up the rest. If necessary, transfer any balances from these cards onto the few you plan to keep. Also important: "Notify the card issuer in writing that you want the account closed at your request, and with no balance remaining, and save a copy for your files," says Kincaid. "This letter can be very valuable if, as it sometimes happens, the account is inaccurately reported as still open and available, or if it's shown as being closed by the card issuer, which is considered a negative in the credit world."
Note: Under some credit scoring systems, canceling credit cards can lower your credit score, not raise it. For example, canceling cards you've owned for many years could lower your credit score because those older cards can establish a long history of responsible credit use. Even so, we still generally favor the idea of canceling cards you rarely or never use, for reasons already mentioned, plus others (including the fact that you'll have fewer cards that can be lost to a thief, and you are more likely to notice problems with cards you use regularly). As one possible strategy, Kincaid suggests this: "Review all the cards you have. Keep only the cards you've had for a long time and handled well by always paying on time."
5. Not periodically checking on your credit report. Many people never or rarely look at their credit report until they apply for a loan or they have been denied a loan or other request based on information in their report. Among the concerns: Inaccurate or missing information in your credit report could raise your borrowing costs or cause delays when you're in a rush to make a major purchase, such as a home.
Solution: Many experts say you should review your credit report from all three major credit bureaus about once a year, but especially before you apply for a home loan or seek some other benefit where your credit report could affect the outcome. See the information in Credit History 101 regarding how to get your credit report and what to look for once you have it. If you find an error in your credit report, write to the credit bureau that prepared it and provide copies of relevant documentation. If the matter isn't resolved to your satisfaction, contact the Federal Trade Commission for general information about your rights.
6. Not using your full legal name in bank accounts, credit applications and other documents that become part of your credit history. "This may seem like a minor issue but it can be important in terms of the accuracy of your credit report," says Joni Creamean, an FDIC Senior Consumer Affairs Specialist. Here's why.
Credit bureaus obtain data from a variety of sources, not all of which include a person's full name, Social Security number or other identifying factors. As a result, aspects of someone else's credit history—perhaps late payments, loan defaults or other serious problems—could be reported on your credit report and could reduce your credit score. Some situations are more likely than others to create mix-ups, Creamean explains. "It's not uncommon for a child and a parent with the similar names to show up on each other's credit report," she says.
Solution: Always use your full legal name when opening a bank account or applying for a loan or other benefit, such as a job or lease. Never leave off a Junior, Senior or similar designation, and never use a nickname. Or, at the very least, be consistent by always using the same name when you fill out these kinds of applications or documents. Following this advice doesn't guarantee that someone else's credit history won't appear on your credit report, but it will reduce the potential for a mistake.
7. Not alerting current or potential creditors if you've moved or changed names. Suppose you move and don't notify your existing creditors. If your monthly credit card statement and other bills don't reach you at your new address, you may miss a payment or two, and that tardiness can be reported on your credit report (not to mention the penalties or interest charges from your card issuer). Or, if you change names because of a marriage or divorce, and you apply for a loan without informing the potential creditor about your previous name, the credit bureau's report may show only your recent financial record under your current name. "If you don't inform your creditors of your name change, your credit record may not reflect your previous hard work at maintaining a good credit history," says Kincaid.
Kincaid also says that if your name or address doesn't match what's being reported by the credit bureau or other creditors, "this can prompt a red flag about a potential fraudulent account, and if nothing else, it can slow down your loan application."
Solution: Call each of your creditors to notify them of a name or address change, and keep a record of who you spoke to and when. Also, follow up with a letter to the appropriate department and mailing address. Some creditors may require specific documentation, such as a marriage license or divorce decree, in cases of a name change. "But even if the creditor doesn't require written notification," Kincaid says, "it may be in your best interest to provide it in writing to protect your rights and document that you made timely notification."
