10 Mistakes to Avoid When Building Your Credit

Building a good credit history and maintaining a high credit score can open doors to higher credit limits and lower interest rates. Following up after “Get Smart About Credit” Day in October, Iowa State Bank is helping to raise awareness about what pitfalls to avoid on your credit journey.

“A strong credit score can make buying a car, a house and anything else that requires a loan more affordable,” said Nathan Wedel, Loan Officer. “It’s critical that consumers know how to avoid situations that can harm their credit, so they can be in the best possible financial position when they need a loan.”

Following is a list of 10 common mistakes consumers make that end up harming their credit. By avoiding these missteps, you can ensure that your credit will stay in good standing.

1. Applying for too many credit cards — Every time you apply for a credit card, a hard inquiry is run on your credit history. Too many inquiries in a short period of time can cause your credit score to drop. Only apply for what you need and what you can manage.
2. Applying for a credit card too late — While children as young as 13 can be authorized users on their parents’ or guardians’ accounts, the CARD Act of 2009 doesn’t allow them to receive their own card until they turn 18. Even then, they must have proof of verifiable income to be approved. The length of your credit history plays a factor in your credit score, so it’s wise to apply for a credit card as soon as you can to get a head start on establishing your credit history.
3. Relying too heavily on credit — Another factor that can impact your credit is credit utilization or how much of your credit you’re using. Once you have a credit card, it’s important not to rely on it for everything.  It can be easy to overextend yourself, which can negatively impact your credit score while piling up unnecessary debt. If you’re a new credit card user, use it sparingly for minor purchases and pay off the entire balance each month.
4. Forgetting to review your monthly statements — Just as important as not overextending yourself is tracking what you’re spending. A credit card can be a great tool for that as long as you review your statements each month. This can help you make adjustments to your monthly budget, while also making sure no suspicious charges appear on your account.
5. Taking out a cash advance — Unlike with regular credit card purchases, in many cases, cash advances start accruing interest as soon as you make a withdrawal. They also have higher interest rates and usually incur a fee — typically around 5% of the withdrawal. You should only use this feature when you have no other options as the sheer cost can plummet you further into debt.
6. Not paying bills on time — Paying bills on time is the quickest way to build a positive credit history. Your payment history accounts for about 35% of your credit scores, so missing payments or consistently making payments past the due date can cause large drops in your credit score.
7. Only making minimum payments — When you receive your credit card statement, it’s important to pay off as much as you can afford. While there may be times when you’re only able to cover the minimum payment, you should try to pay off the balance in full as often as you can and consistently pay more than the minimum payment to avoid running up large amounts of credit card debt.
8. Closing accounts without examining the impact on your credit utilization rate — If you are trying to eliminate credit card debt, you might be inclined to close accounts you don’t want to keep after you’ve paid off the balance. However, closing them will reduce your credit utilization rate, which can cause your total credit utilization to go up, dropping your credit score. Every situation is different so be sure you understand the impact closing an account may have on your utilization rate before deciding whether to close it.
9. Choosing longer auto loan terms — When buying a new car, carefully consider the loan term you want. Some dealerships will offer terms as high as 84 months, which can reduce your monthly payment. That also means you will be making payments for a longer period of time, and you will accrue a higher amount of interest.
10. Not checking your credit report — Visit www.annualcreditreport.com at least once a year to request a free copy of your credit report from each bureau and promptly dispute any errors.

Source: Iowa Bankers Association