Your credit score is an essential part of your financial life. Along with other factors, it’s used to determine your interest rates and whether you’ll be approved for new lines of credit at all. Negative information could weigh your credit score down and may impact your financial health, so it’s important to be aware of these five common credit scenarios.
1. Charging too much on your credit cards
Roughly 30 percent of your credit score is determined by the amount you owe, so racking up a high balance on your credit cards could hurt your score. The amount of credit you use is known as your debt-to-credit ratio and is one indication of your creditworthiness. A high debt-to-credit ratio means that you are borrowing a large portion of your available credit. The more you charge, the higher your debt-to-credit ratio climbs.
Maintaining a lower debt-to-credit ratio can often make you appear more favorable to lenders. Experts agree that you shouldn’t use more than 35 percent of your available credit at any one time—even if you pay your bills in a timely manner.
For example, if your credit limit is $1,000 on a credit card and you charge more than $350 on that card, it could negatively affect your credit score.
2. Making late payments
It can be easy to forget about your bills, but just one late payment on your credit accounts could negatively affect your credit score. Payment history is one of the most important factors that help determine creditworthiness, accounting for approximately 35 percent of your credit score.
Your credit score is also impacted by how often you make late payments, the length of time past due, and the dollar amount of the missed payments. If you have a high credit score to begin with, one late payment could actually have a more significant impact than if your score were lower.
If you fall behind on your bills and a late payment is added to your credit report, it could remain there for up to seven years. If you continue to miss payments on one of your credit accounts, it may be sent to collections, which could result in another ding on your credit score.
Paying all of your accounts on time is an important part of maintaining financial health. If you have difficulty with this, develop a budget and set calendar reminders to help you make your payments on time.
(Read more: How Long Does Information Stay on My Credit Report?)
3. Applying for too much credit
Every time you apply for a new credit card or loan, it results in a hard inquiry on your credit report. Because a hard inquiry lets creditors know that you are seeking new credit, it could negatively impact your credit score in the short term. New credit, which includes the number of new accounts in relation to all accounts in your credit file, makes up 10 to 12 percent of your credit score.
Opening new credit accounts can also affect your average account age, which is the length of time your credit accounts have been open. The length of your credit history makes up about 5 to 7 percent of your credit score, and in general a longer credit history is viewed more favorably by lenders.
4. Having only one type of credit
It’s important to have a number of different types of credit in your credit file. Holding different types of credit accounts can show lenders that you are a reliable borrower capable of handling a diverse range of credit, including department store credit cards, student or auto loans, and mortgages. About 15 percent of your credit score reflects the kinds of credit accounts you use and how many of each you hold. Ideally, you will have four tradelines of different types, such as credit cards, student loans, a mortgage, or an auto loan.
5. Neglecting to regularly monitor your credit
You should regularly pull a copy of your credit report and carefully review it. You are entitled to a free copy of your credit report each year from each of the three national credit reporting agencies (CRAs) through AnnualCreditReport.com.
If you do find a mistake, file a dispute with the CRA reporting the error as soon as possible. At Equifax, you can file a dispute online, by mail, or by phone. You can also directly contact the creditor involved with the error.
Errors may also be a sign that you are a victim of identity theft, which can have a serious impact on your credit score. Review your report carefully to make sure the payment history, balance amount, and account age are correct for each of your credit lines, and confirm that your personal information is accurate.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.