Building your credit score is probably one of the most important things that you can do to improve your financial future
Not only can having a good credit score get the lowest interest rate anytime you buy a house, finance a car, rent an apartment or build a business.
But it’s also extremely easy to do once you just understand the basics of how it works.
I listed out everything you need to do to increase your credit score by 100points in a previous post.
You can read it below;
However, the bad news is that because the concept of building your credit tends to be so simple it also means that it’s often very simple to ruin as well without even realizing it.
So in this article, we’re gonna be going over the five things you absolutely must avoid at all costs that will totally destroy and ruin your credit score.
The best part about all of these is that they’re extremely easy to prevent.
Here is a break down of what we will be covering today.
1. Missing Payments
The first and probably worst thing that you can do that will totally destroy your credit score is by missing a payment or paying it off late.
This is probably one of the most detrimental mistakes that you could make because your payment history makes up about 35% of your overall credit score.
This means that if you have a 780 credit score but then you miss a payment by more than 30 days that could potentially drop your score all the way down to 690 or below.
Missing a payment could quite literally be the difference between qualifying for the home you’ve always wanted to buy or getting denied for your loan all for one single late or missed payment.
And what’s even worse is that your payment history stays on your report for seven years so if you have one single late payment that’s going to be with you for quite some time like those pesky friends who always overstay their welcome.
When it comes to preventing these from happening,
Here are two things I always do;
1. Enable Auto Pay
The first is always having Auto Pay enabled to at the very least make the minimum payment.
This way no matter what happens I will always pay off the minimum amount I owe. So that it shows I’ve always paid on time.
This is because when credit cards report late payments they consider a late payment as no payment at all.
But as long as you just make the minimum payment which could be as low as $25, then technically you’ve still paid your bill on time as agreed even though you’ve carried a balance.
2. Keep Track of Report
Secondly, I use creditkarma.com to keep track of my credit card balances every few weeks.
If I see any credit card with a balance usually what I’ll do is I’ll just go and pay it off in full just so I don’t forget about doing it later.
Doing all of this maybe takes me a few minutes every other week just to manage and make sure it’s all taken care of.
So it’s very easy to do.
However, with all of that said there is some good news.
When you miss a payment by a few days usually nothing will happen even though you’ll still be hit with a credit card late fee.
Usually, they will not report a late payment to the credit bureaus until you were more than 30 days late.
This means that in most situations if you end up paying your credit card off 29 days late usually you’ll be okay as far as your credit score is concerned.
However, don’t ever push it that late obviously but just in the event something happens and you paid off a few days late usually it’s not the end of the world.
Anyway moral of the story is that always make sure you pay off your credit card on time, in full and always have Autopay enabled just in the rare occurrence that something happens and you accidentally forget.
You could also sign up for a credit builder like Kikoff that would allow you build your credit with ease.
I have a post on it already;
2. Maxing out Credit Cards
The second ruiner of credit scores and this is something that many people are guilty of at some point or another is by maxing out their credit cards.
That is because 30% of your credit score is broken down by what’s called Credit Utilization which is basically how much credit you have available to you versus how much of that you actually use.
This means if you have a $3,000 credit line and you spend all $3,000 on shopping, then guess what? congratulations you’re now seen as a higher-risk borrower to lenders because you’ve used all the credit you have available to you.
And then statistically from that, you’re less likely to repay it.
So when it comes to avoiding this mistake, thankfully it’s very easy to do in a few very simple steps;
1. Keep Credit Utilization Under 30%
The first one is to always keep your credit utilization under 30% which means for every $1,000 of credit you have available to you you’re not going to spend more than $300.
That seems to be the sweet spot for credit bureaus and under a 30% utilization gives you enough wiggle room to be seen as a low risk borrower and therefore have a slightly higher credit score.
However if you credit limit is too low then it because extremely hard to stay in that sweet spot.
There is a simple hack and i have could everything you need to know in the Navy federal $10,000 credit hack;
2. Pay Off Credit
The second thing you can do if you need to make larger one-time purchases is to pay off your credit card as soon as you exceed 30 per cent.
For example, I had to get a new roof and that was going to be $14,000 so I put it on a credit card to get the points even though that credit card had a credit line of $20,000.
So pretty much once that $14,000 charge was posted on my credit card I just went and paid it off in full so that way it would never be reported to the credit bureaus.
And it would show that I had no remaining balance and you could do the exact same thing as well.
Even if you don’t pay off your credit card in full what you can do is still make a very large payment to get your credit utilization below 30% so that way you still get the best credit score.
3. Multiple lines of Credit
The third strategy that I’ve utilized is to have multiple lines of credit open so that way it lowers your overall credit utilization.
For example, if I have the $3,000 credit available to me overall and I go and spend $3,000 the next day.
Well, there we go that just hurt my score however if I have 10 credit cards with a $100,000 overall limit and I go and make that same $3,000 purchase well that’s fine because it shows on my credit report that I’m only using 3% of my overall credit limit.
With all that said the good news when it comes to this is that;
This only temporarily lowers your score until you pay it down so yes it could affect your score in the short term but in the long term you really have nothing to worry about as long as you just pay it off in full.
3. Too many Credit Lines at a time
The third credit score mistake is something that you are probably going to have to deal with at some point or another if you haven’t dealt with this already and that is opening too many lines of credit too quickly.
This is when you go and apply for multiple credit cards at the same time or you apply for a credit card and then apply for a mortgage and then apply for an auto loan because you want to flex on YouTube.
Each time you apply for a new line of credit it’s called a hard inquiry.
Which means a third-party company runs your credit indicating that you’ve applied for a new loan.
Each time this happens it lowers your score between three and five points and also affects your credit report for the next six months.
This one is a bit of a double-edged sword because the more credit you have available to you the more diverse your credit report is.
And because of that, the higher your score will be on the long term.
In the short term, however, the more cards you apply for at the same time will show that you are a risky borrower to lenders and because of that you’ll tend to have a bad credit score.
That’s why it’s very common for people to think that they don’t want to open up new credit cards because it’s going to lower their score and that is very true but in the short-term.
But this is almost like an evil necessity because in order to get a larger credit limit and have a larger credit portfolio and a larger credit history you’ll need to go through a phase where your credit score is lowered as you apply for new credit cards in the short term.
When it comes to doing all of this, here is my advice if you’re planning to finance any large purchases over the next six to eight months like a car or a house.
Do not open up any new lines of credit.
To me, this is just too risky to do and you risk lowering your score at a time you need it the most and that can be absolutely detrimental to your loan.
However, if you have no upcoming plans to finance any large purchases over the next eight months then I think it’s pretty safe to say that you’re safe opening up new lines of credit.
Take the hit short term knowing that long term you’re gonna come out ahead even stronger.
I do this myself as soon as I buy a property.
As soon as that loan closes, I will go and apply for new credit cards to get the sign-up bonus knowing that by the time I buy my next property within about 12 to 16 months my credit score will be back to normal and I get the new lines of credit.
Anytime you go and implement this just at least plan ahead.
Be strategic about it and don’t do this anytime you’re within about 8 months of making a very large purchase that you’re going to be financing.
4. Closure of Credit Cards
The fourth biggest ruiner of credit scores and this is easily preventable. It’s simply not closing any old credit lines that you have open.
This is something that can have a hugely detrimental effect on your credit score without you even realizing it.
That’s because the average length of your credit history makes up 15% of your credit score so when you go and cancel an old credit line you inadvertently also lower the average age of your credit history.
This is why it’s so important to keep your oldest accounts active and open even if you never use them because this weighs down your credit history showing that you’ve opened it longer.
And even though this one makes absolutely no sense to me but when you go and cancel an old credit card, it also cancels the active account length of that card as well I don’t get this one either.
But for some reason, credit report agencies love only factoring in active account history, not total account history (doesn’t make sense to me).
Whatsoever I think they should go based off total account history but you know what I didn’t make the rules this is just the way it is.
Anyway, always and I repeat always keep old credit cards open and active even if you never use them because doing that will affect your score by about 15% from the average account history.
5. Not Having a Credit History
Finally, the fifth credit score mistake and this is something that I was so guilty of because this is so common.
I see so many people making this mistake and it’s the worst. What is this mistake? It is simply not having any credit history at all.
People who pay for everything with a debit card, pay their car off in cash, and never borrow any money because they don’t need to fall into this trap (credit score mistake).
Trust me when I say this but I was this person growing up and even though you would think that these are the people who should have the best credit score possible because they never needed to borrow money.
Well, the entire system when it comes to this is backward.
if you don’t have any credit history, you’re just an unknown person to lenders and they have absolutely nothing to go off on.
And because of that, no lender will ever loan you money for a house or a car or anything you want to finance in the future even though you could be the best borrower in the world because you’ve never needed to have a credit card.
Lenders don’t see it that way because they want proof that you’ve handled debt responsibly and you can actually pay it off and this system is so backwards.
Even someone who has just a few credit cards and maxes them out and pays late and also has a terrible credit score, He/she is still going to get chances to get the loan at a really high-interest rate, unlike someone who doesn’t have any score whatsoever and just denied.
Because of that, having something on your report even though it’s negative is still better than having nothing on your report at all and I had to learn this lesson the hard way.
Before you go, here are two articles i recommend you try out;
- Authorized User Trick – Gain 80+ Credits Points Instantly (Guaranteed!)
- Common Credit Repair Scams that Can Leave You Broke or In Jail
With that said those are the five biggest credit card mistakes that can absolutely ruin your credit score without even realizing it but they are totally preventable.
When it comes to the foundation of building your wealth, investing and eventually becoming Lambo rich in the future I really believe that building your credit is one of the most important things that you can do.
I would really appreciate it if you enjoyed this article and share it with your friends and family.
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Bye for now…
Leave a comment below to tell me which of these mistakes you already made and how you worked your way out of it.