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Your credit history can affect your everyday life in ways you may not even realize. Besides helping determine what loans or credit you’re offered and at what interest rates, it may play a role in job offers or home rentals, among other things. That’s why keeping tabs on your credit history, as reported on your credit reports — and the information in credit reports, which is used to calculate credit scores — is essential.
It’s also important to maintain responsible credit behaviors and — if possible — try to avoid missteps that may wind up costing you money in the long run. Here are some examples of those pitfalls:
Making late payments
What’s the big deal with making an occasional late payment? It may seem harmless, but consider:
- Late payments can remain on your Equifax credit report for up to seven years from the date of the missed payment. The late payment remains even if you pay the past-due balance.
- Your payment history may be a primary factor in determining your credit scores, depending on the credit scoring model (the way scores are calculated) used. Late payments can negatively impact credit scores.
Making only the minimum credit card payment each month
The higher your credit card balances, the more interest you may pay. Interest is simply the cost of borrowing money. You can avoid or minimize interest charges by paying your credit cards in full each month or paying as much of the balance as possible, on time. Credit card statements are required to list how long it would take you to pay off your balance making only the minimum payments, and how much more you'll spend over time factoring in interest.
Maxing out your credit card
Carrying balances at or near your credit limit on your credit cards may not only incur more interest, it can negatively impact your debt-to-credit ratio. That’s the amount of credit you’re currently using compared to the total amount available to you. Generally, lenders and creditors prefer to see that ratio below 30 percent; a higher percentage may negatively impact your credit scores.
Misunderstanding introductory credit card interest rates
That low interest rate may be enticing. But introductory credit card rates may expire after a certain period of time, meaning your interest rate increases and you wind up paying more than you expected. If you’re applying for a new credit card, be sure to check how long the introductory interest rate will last and how much it may increase after expiration.
Not reviewing your credit card and bank statements in full each month
If you're not reviewing your monthly bank and credit card statements, you could miss signs of suspicious activity that may indicate fraud or identity theft.
Closing a paid-off credit card account
It’s paid off, so why think twice before closing that credit card account? Two things:
- Closing the account could raise your debt-to-credit ratio, which may negatively impact your credit scores.
- Closing the account may change the mix of your credit accounts. Generally, lenders and creditors like to see a variety of credit accounts.
- If you’ve had the account for a long time, closing it may reduce the average age of your accounts, which may negatively impact credit scores. In general, lenders and creditors like to see that you’ve been able to responsibly handle different types of credit over time.
Taking a loan offer without shopping around
Even a small difference in interest rates can save you money. It’s true that a hard inquiry is generated each time a potential lender or creditor reviews your credit reports in response to a credit application. Hard inquiries can negatively impact credit scores. However, if you are shopping for a vehicle loan or a mortgage, multiple inquiries for the same type of loan within a given period of time are generally counted as one inquiry for credit scoring purposes. That period may vary depending on the credit scoring model used, but it’s typically from 14 to 45 days. This allows you time to shop around with different lenders.
That same exception doesn’t apply to other types of loans, such as credit cards. All hard inquiries for those types of loans may negatively impact credit scores.
Not checking your credit reports regularly
Your credit scores are calculated using information in your credit reports, so it’s a good idea to review your credit reports at least annually. Inaccurate or incomplete information on your credit reports may negatively impact your credit scores. That, in turn, could influence the interest rates you may be offered.
You can visit www.annualcreditreport.com to get free copies of your credit reports every 12 months from each of the three nationwide credit bureaus.
Not checking your credit scores
While credit scores are not typically part of credit reports from the three nationwide credit bureaus, there are several ways you can check credit scores. Some credit card companies and financial institutions provide credit scores for their customers. You can also use a credit score service or a free credit scoring site, or purchase scores directly from one of the three nationwide credit bureaus or other provider.
Remember, you don’t have only one credit score. Score providers and companies use different credit scoring models and may use different information to calculate credit scores. In addition, some lenders and creditors do not report to all three nationwide credit bureaus — they may report to two, one or none at all. And lenders and creditors may use additional information, other than credit scores, to decide whether to grant you credit — your income, for example.
Mistakes can happen, particularly if you've fallen on hard times. But remember that nothing is permanent — given time and adoption of responsible credit behaviors, you can make progress.
