If you have bad credit, you may be relieved to know that you’re not alone.
According to Experian, about a third of Americans have poor or bad credit. The good news is, the number of people who have declared bankruptcy has been consistently falling since it peaked in 2010.
The economic crisis was a harsh blow for credit scores, and many Americans are still recovering. You’ve decided to join the ranks of diligent credit builders, and you’re on your way to one day being a proud member of the 800 Club. The great thing about credit scores is that you can always, always bounce back from a decrease with enough time and effort.
You might already know a lot about the best ways to build credit. Maybe you even know that there are ways to build your credit without using credit cards at all.
But did you know about all of the mistakes you can make while trying to build your credit? Here are the 12 worst ways to build credit.
- Closing your old accounts.
Many people with bad credit assume that closing up all the accounts they paid late on or had trouble with will help them improve their score. In fact, it can easily have the opposite effect.
Cancelling credit cards can actually have a negative impact on your credit score. One of the most important factors in your credit score is the average age of your credit accounts. If you close a credit card you’ve had for a while, especially if it’s your oldest card, you will see your score decrease. Instead of closing accounts on which you were delinquent, focus on getting those late payments removed from your credit report.
If you no longer want to use a card, just cut it up instead of closing it.
- Applying for credit cards you aren’t ready for.
Getting a new credit card, such as a secured credit card designed for re-building credit, can be a brilliant way to build your credit score.
However, if your credit isn’t all that great, it’s very important that you don’t apply for major credit cards that are hard to get. You’ll simply get denied, and the inquiry that the credit card company did on your credit report will lower your score temporarily.
Do your research and make sure you’re applying for cards that approve people with credit scores like yours. If your score is low, retail store credit cards are easier to get. If your credit is below 500, you may want to consider starting with a secured credit card.
If you do get denied for a credit card, wait until you receive the denial letter in the mail to apply for a new one. This letter will let you know why you were denied, and you can take that into account when deciding what steps to take next.
- Opening too many credit cards at once.
While opening a new credit card can be a good way to build your credit score, do it wisely. Opening up too many credit cards at once can decrease your score.
The amount of new accounts you have on your credit report is part of your credit score, so you want to keep that number low. Start with one credit card, and once you feel comfortable using that responsibly you can think about opening up a second one. Eventually, it can be helpful to have a few different credit cards.
- Only having one credit card for a long period of time.
Even though it’s important to start out slowly, especially if you have bad credit, you will eventually want to open up more than one credit card. It’s always nice to have a backup, but having additional credit cards can also improve your score.
This is because your debt to credit ratio is one of the most important factors in your credit score. If you have more available credit, your credit score can improve.
- Using up all of your available credit.
Because your debt to credit ratio is so important, using up all your available credit while trying to re-build your score is a huge mistake.
You might have a low limit on your credit card if you have poor credit, so it can be easy to max it out. Be sure to pay it off each month to avoid using too much of your available credit. Your debt to credit ratio should be below 30%.
- Carrying a balance.
Every once in a while, something may come up that makes carrying a balance for a month necessary. However, it should be a once in a blue moon kind of thing.
You don’t want to pay needless interest – simply pay off your balance in full every month. Many people believe that carrying a balance helps you build your credit score, but this is not necessarily true. Unless you have a credit builder loan…
- Paying off your loans too early.
If you’ve taken out a credit builder loan in order to re-build your credit score, you actually don’t want to repay this too early. If you do, your credit score probably won’t increase very much, and you’ll have to take out another one. The purpose of these loans is that banks want to see you can repay your debts over a long period of time.
- Missing payments.
This one should be obvious, but it can’t be stressed enough. Late payments are the single worst thing you can do as someone who is trying to build credit.
It can be difficult to remember to pay your credit card bills on time, especially when you’re first starting to build your score and perhaps aren’t used to having a monthly credit card bill. However, all major credit cards allow you to set up automatic payments on their website, so you don’t ever have to worry about it. Do this as soon as you get a new card.
- Using pre-paid credit cards.
Many people will try to use pre-paid credit cards to build their credit because they’re available to everyone. However, these cards do not build your score, as they don’t report to any of the major credit bureaus. Make sure that the cards you’re applying for do reporting.
- Opening up a sub-prime credit card without reading the terms.
There are plenty of subprime lenders out there that target people with bad credit and offer them loans and credit cards when no one else will. However, almost all have terrible terms and conditions. They charge outrageous hidden fees, sky-high interest rates, and more. Make sure that you carefully read the terms and conditions of any credit card or loan that you apply for.
- Swearing off credit cards.
Although you want to be careful when opening up a new card, some people with bad credit have become so scared of credit cards that they swear them off completely.
This isn’t the wisest decision if you want to re-build your credit score. Credit cards help you re-build your score, and one factor in your credit score is the diversity of your credit portfolio. You want to have several different types of credit accounts.
It can be very hard to push your score up to good, let alone excellent, if you aren’t willing to have (and use) a couple credit cards. Just make sure you’re ready to use them responsibly.
- Bringing back old habits.
The hardest mistake to avoid when trying to build your credit score is falling back into your old habits. You got into a rut with your credit for a reason, so make sure that you’re lesson has been learned. Don’t let yourself go back to using credit to purchase things you can’t afford or missing payments.
Now you’re ready to get out there and repair your credit score.
