Your credit report and corresponding credit score are probably a lot more important than you realize. While most folks are likely aware of the role a good or excellent credit score can play in their ability to open a new line of credit or be approved for a home loan, it can affect so much more.
For example, your credit report may be viewed, with your permission, by prospective employers as well as landlords. If this prospective employer or landlord doesn't like what he or she finds in your credit report, you could be denied the job and/or rental of your dreams.
Similarly, insurance companies and utilities may use your credit report when pricing their services. Insurers have shown through studies that folks with lower credit scores are usually costlier to insure. Therefore, if you've demonstrated irresponsibility with your credit usage, you can probably expect to pay more for auto and/or home insurance.
As for utilities, while they can't deny service due to a poor credit report, they can certainly require a large deposit before commencing service if you have trouble paying your bills on time.
In other words, it's imperative that you understand the factors from FICO and VantageScore (the two primary credit scores used by lenders) that can impact your credit score.
Don't fall victim to these common credit mistakes
Of course, understanding these credit basics isn't enough to keep you from making credit mistakes that could cost you money. Here are four of the most common credit foul-ups you'll want to avoid in order to increase or maintain your credit score.
1. Closing a good-standing account because it's paid off
There's nothing quite like the exhilaration of paying off a large bill and seeing the balance of a credit account move to $0. However -- and this is especially true for revolving credit accounts, such as the type you'd find in department store -- closing good-standing accounts generally isn't a good idea if you're trying to improve or maintain your credit score.
Though you might be under the impression that closing an account you've paid off, or rarely use, will be construed as a responsible move by creditors, it tends to hurt two of the key factors that go into establishing your credit score: length of credit history and the credit utilization ratio.
By closing an account, you may be reducing the average length of time your credit accounts have been open, thereby decreasing the number of data points that lenders use to determine you trustworthiness in paying back loans. Likewise, closing an account will lower the aggregate amount of credit available to you. If you do have outstanding balances, this will increase your utilization ratio, or the percentage of your credit used as compared to your aggregate credit available. If this ratio jumps above 30% as a whole, or even for individual credit accounts, it could hurt your credit score.
2. Failing to ask your lender for late-payment forgiveness
Another common mistake is failing to ask your lender(s) for forgiveness if you've made a late payment.
Generally speaking, most lenders will reverse a late fee, as well as the corresponding negative mark that would be reported to the credit bureaus, once every 12 to 24 months. To be clear, this is a rough estimation on my part given the practices of a few lenders I'm personally familiar with. Late payment forgiveness offered by lenders tends to be unique to each person's situation, and therefore (usually) cannot be confined to any specific timeframe.
The issue here is that most folks are scared of what their lender might tell them, not realizing that "no" is the worst thing they'll hear. If you have a good or excellent credit score and a history of timely payments with your lender, there's a decent chance that a slightly late payment will be forgiven. That'll save your credit score from a negative hit, as well as keep your credit card APR from spiking higher.
3. Not speaking directly with your lender if you're struggling to make your payments
To build on the previous point, if you're financially struggling to make ends meet, the worst possible thing you can do is nothing. While it can be embarrassing to admit that you've purchased goods and services that you can no longer pay for, admitting this to your lender(s) is the first step to forming a payment plan that works for both parties.
Believe it or not, your lender has virtually no desire to turn a delinquent account over to a collection agency. Collection agencies will keep a portion of whatever they manage to recover, and the lender winds up losing a member. It's actually considerably cheaper for lenders to keep an existing member than it is for them to enroll new members. Plus, by not turning an account over to a collection agency, the lender would get to keep all of the money collected via a payment plan. By working out a plan, regardless of how delinquent you are on your account, you may be able to minimize the adverse impact to your credit score.
4. Failing to quickly use your cash rewards/points
According to CreditCards.com, around 192 million Americans have at least one credit or charge card in their wallets. And chances are that many of these card-carrying Americans have at least one rewards card. These cards allow users to receive either cash or points in exchange for charging goods and services on the card. It's a great tool for building brand loyalty, but it's also an easy way for consumers to lose money without ever realizing it.
As someone who can attest to this mistake firsthand, the secret with rewards card is using your cash back or points as quickly as possible. Though these points and cash-back rewards don't expire, your rewards aren't investable and don't generate interest over time. This means that as time passes, the purchasing power of your rewards is declining due to inflation, or the rising price of goods and services. By effectively putting your points and/or cash under the mattress, you're discounting their purchasing power.
Long story short, while understanding the basics of your credit score are important, there are a number of proactive steps you'll also want to take to ensure your credit report, credit score, and rewards are working for you.
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