The basics of building credit are simple: use credit, pay it off on time. Rinse and repeat.
However, while on-time payments are the most important factor to your FICO credit score, payment history only makes up 35% of it. That means that there’s still another 65% of your credit score that’s influenced by other behaviors, such as how much debt you have, how much credit you can access and what kind, recent credit inquiries, and a number of other factors.
The exact method for calculating credit scores isn’t even published. Because of that, there are a lot of credit myths that can hurt your score, and even the most financially savvy sometimes make mistakes. Here are some of the top credit score mistakes you may be making.
1. You’re too wary of debt.
Most of us either had a parent who told us that credit cards were only for emergencies, or we were that parent. While that may be a good strategy for a teenager who hasn’t quite learned the consequences of credit card debt, it’s not the best motto to live by if you’re an adult capable of exercising responsible spending habits.
When it comes to credit scores, there’s a little bit of a use it or lose it factor. Having access to credit but never using it won’t help your score.
A good rule of thumb is to put all your regular, necessary purchases, such as gas, food, and possibly bills, on your credit card and then pay it off in full each month. Then, only make luxury or unnecessary purchases with money you have in the bank to avoid racking up unmanageable debt.
It’s also wise to have more than one credit card, as it shows banks that you’re capable of juggling multiple payment deadlines.
2. You only have one type of credit.
Credit mix makes up 10% of your credit score and refers to the different types of accounts and credit you have access to. Having a mortgage, car loan, and credit cards on your credit report will serve you better than having only credit reports, assuming you manage them responsibly.
However, that doesn’t mean you should take out a loan just to improve your credit score. All this point means is that you shouldn’t be worried about taking out a loan for something you need, as long as you’re able to get a good rate and pay it off.
In fact, you never have to spend money – on interest, or anything else – in order to increase your credit score. Credit is meant to be built up naturally and progressively.
3. You max out your credit card.
It’s obvious that maxing out a credit card with a $10,000 limit when you take home $2,000 per month is unwise. But even with a low limit credit card, running up the balance each month isn’t a good idea.
This is because 30% of your credit score consists of your utilization, or your balance to limit ratio, making it the second most important factor. Essentially, carrying a $1,000 balance on a credit card with a $10,000 limit is far better than carrying a $700 balance on a credit card with an $800 limit. Experian recommends that you keep your credit utilization rate stay below 30%.