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%.
If you tend to bump up against your limit each month, you should consider requesting a credit limit increase. This will help your credit score in the long run. As always, try your best to pay off your balances in full each month.
4. You close unused credit cards.
Because credit utilization is such an important factor in your credit score, closing an unused credit card isn’t always the best idea. This will decrease the amount of credit you have access to and increase your credit utilization rate, unless you maintain a $0 balance across all cards.
Another important factor in your credit score is your length of credit history, which is 15% of your credit score. The longer your accounts have been open, the better, and closing older accounts can hurt this portion of your credit score.
That being said, if the unused credit card is newer and you can request a credit limit increase with other credit cards to keep your utilization low, it probably won’t hurt you to close the card. If the card charges an annual fee and you aren’t using it, it’s almost always worth closing it.
5. You don’t take advantage of credit card rewards.
What’s the point of a good credit score it you don’t use it? Aside from obvious perks like lower mortgage rates, one of the most fun advantages of having excellent credit is being able to access premium rewards credit cards.
When used wisely, rewards credit cards can help you save hundreds of dollars every year. Cash back credit cards can offer rates of up to 6% and are an easy way to save money.
Travel rewards credit cards can be a little more complicated to navigate, and a lot of people end up racking up points and miles they never use. However, if you can figure out how to maximize them for your spending habits and travel preferences, you can easily save more than $1,000 per year on travel.
6. You apply for too many credit cards at once.
While having only one credit card is a little too prudent, applying for several at once is also unwise. Recent activity accounts for 10% of your FICO score, and having lots of new credit inquiries can bring your score down significantly.
That being said, your credit score will start to bounce back up from credit inquiries after 3-6 months, and they’ll fall off your credit report after just two years. Having a couple recent inquiries is unlikely to damage your credit score in a noticeable way, and opening a new credit card isn’t necessarily bad. Try to space out credit inquiries and apply for only one card every 3-6 months.
7. You haven’t set up automatic payments.
Many people don’t set up automatic payments to their credit card. Often, they’re worried about overdrawing their account. However, overdrawing your account is less detrimental than missing a payment to your credit score.
Automating your payments is the most effective way to ensure that you never make a late payment, and it’s also the best way to create and stick to a budget.