How old were you when you realized that you should probably start to monitor your credit? For full disclosure, I really did not jump on the bandwagon until I graduated college in 2016. That is 23 years of potential credit building down the toilet! Do you want to hear something really sad? It isn’t that uncommon for this to be the scenario for most young adults. In fact, There is an unsettling amount of the population that does not take credit into account when handling finances. In knowing this, I felt in my soul that we needed to have a post about monitoring, building, and protecting your credit. In my eyes, the best way to have strong credit is to avoid certain things that can harm your score. Do you know what could do this? Here are 7 things that you may not know are lowering your credit score.
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Not monitoring it as soon as possible
Regularly monitoring your credit is ESSENTIAL in protecting your score for a few reasons. The sad thing is, most people are not aware of how credit works, or don’t take it seriously. In fact, according to CNBC.com: “about 4 in 10 Americans don’t know how their credit score is determined.” How disastrous! Here are a few reasons why establishing your credit is important:
- – It establishes your progress in relation to your financial freedom
- – You can track for discrepancies on your report, and get them cleared.
- – you protect yourself against social security number scams that unfortunately plague more young adults than you think.
Not establishing credit
Not having credit is possibly just as bad as a low score. It tells lenders that they are taking a gamble with trusting you. because you are not providing any history of spending behavior many lenders will turn the other way towards people with a longer rap sheet.
Some ways to establish credit:
- – open a low limit card.
This will be a card with maybe 500 – 1000 dollars allowed per payment cycle. a few months of using it (lightly) and paying it in full every month will have your score looking healthier than ever.
- – opening small bills in your name
- – student loans.
While taking out student loans is NOT advised, it is the only source of credit history that I had when coming out of college. (and aided in me graduating with a 700+ score).
Paying the minimum
Have you ever noticed that sometimes when paying the minimum on your bills, your score goes up by 1 point per month? It can even be worse, and decrease if you don’t pay attention to the details.
It is because large amounts of debt vs. small payments can harm your score. It is most likely due to the interest rate on the loan. A lot of people do not know that opting for a low income based payment can hurt you more than help.
There was a time when my interest for my private school loan was higher than my minimum payment. truly debilitating!
Opening new lines of credit
Opening a new line of credit causes a pull on your report. That pull can cause your score to lower slightly. This is a normal process, and if you have a healthy report history, your score will naturally heal within a few weeks. Unfortunately, this is not the same case for those of us just starting on our journey.
When just starting with building your credit, you will benefit from having a long report. The older your account the better your average credit age will be. Naturally, your age will decrease if you add a new line. this can also affect your score in a negative way, and is why I think long and hard before opening a new account.
Maxing out your credit limit
I always try to follow the rule of thumb to use no more than 10 – 30 percent of my total limit every month. this is possible mainly due to my killer budget and a lot of dedication.
Being responsible with the amount of credit that you use tells lenders that you don’t necessarily NEED to use all of my limit.
By doing this, no one will have to worry about your ability to pay off that card every month, and you won’t have to fall victim to that dreaded APR.
This is the most obvious way to harm your progress. The absolutely worst thing that could happen is an account going into default. It can tank your score by hundreds of points at a time, and require you to be in repair mode for years.
This is why monitoring your score, paying your accounts in full, and having a handle on your report is so crucial.
Paying your taxes also comes into play here. Especially for those of us that are new to the workforce. It can get a little gray when you aren’t quite removed from your parents houses, and you do not know if you are considered a dependent. ALWAYS make sure that you re in good standing with the IRS.
There is no excuse for anyone to be skimping on taxes when there are free options out there.
Closing old accounts
This is another factor that used to really affect my score in a negative way. With the growing population of financial gurus saying that debt is bad, and getting rid of ALL DEBT is a good thing, it is easy to mess up your progress. I rushed to pay off a $15,000 student loan in my journey to become debt free, and once I completed the task ,my score dropped 20 points!
I was devastated…
It was because I didn’t realize that this loan was the oldest one on my report (dating back to 2011). Please do not make the same mistake that I did. I now try to strategize the debts to complete so as to not affect my credit age.
These were the 7 ways that you unknowingly ruin your credit score. My goal was to provide some ways that you can protect your progress to financial freedom. What are your thoughts on credit? Are there any other things that are bad for your report that I did not include on this list? Please leave a comment with any feedback below, and I will be in touch soon!
In the meantime check out some of my other posts.