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If your credit score has taken a hit, you probably want to fix it as soon as possible. There are all kinds of ways bad credit costs you money, from higher interest rates on loans to fewer credit card options. It can be even more frustrating if you used to have a good credit score and didn't need to worry about your credit.
The most important part of rebuilding your credit, especially when you want to do it quickly, is avoiding mistakes. Here are the ones that can leave your credit score stuck in place or cause it to drop even lower.
1. Not using a credit card
It's understandable that you'd avoid using a credit card while rebuilding credit. Credit cards could be the reason your credit score dropped in the first place. And if your credit cards were canceled, which often happens after you miss too many payments or declare bankruptcy, you may struggle to find a new credit card you can open.
However, using a credit card regularly helps your credit quite a bit.
When you make purchases every month with your credit card and pay the bill on time, you build your payment history. That's the most significant factor in calculating your credit score. How long you've had a credit card open also affects your credit, so it's important to have at least one card open.
If you're having trouble qualifying for a credit card, try secured credit cards. This type of credit card requires a deposit upfront, which makes it much easier to get.
2. Carrying a credit card balance
There are two ways carrying credit card balances can hurt you:
- Your credit card company can charge you interest on balances you don't pay off by the due date.
- Higher balances mean a higher credit utilization ratio (the amount of your total credit you're using). This can negatively affect your credit score.
This is one of those issues that usually starts small, then spirals out of control. As you get into the habit of not paying your entire credit card bill, your balance gets bigger. Eventually, your credit score drops because you're using too much of your credit and paying costly interest charges.
The smartest approach? Only charge what you can afford, and always pay your full balance.
3. Applying for new credit cards too soon
As your credit score goes up, you may find yourself eager for a credit card upgrade. Credit cards for bad credit don't have lots of features, so it's natural to want something better.
It's not a good idea to jump the gun, though. Every time you apply for a credit card or loan, the lender runs a hard credit check. This has a small negative impact on your credit. You may get approved, but at the cost of slowing down your credit score progress.
A new credit card will also lower the average age of your credit accounts. As mentioned earlier, that affects your credit score.
Your main goal should be getting good credit, meaning a FICO® Score of 670 or above. At that point, you could qualify for some of the best credit cards, so it'd make sense to consider applying for a new one.
4. Not reading your credit reports
Reading credit reports probably isn't how you want to spend a Saturday afternoon, but it's a must.
Errors on credit reports are more common than you might think. A Federal Trade Commission (FTC) report found that 1 in 5 consumers had errors on their credit reports. If you find and dispute errors on your credit report, it could result in a big boost to your credit score.
You can request your credit reports from the three consumer credit bureaus at AnnualCreditReport.com. You're normally entitled to one free report per bureau every year, but through April 2021, you can get free weekly reports.
No matter how much your credit score has dropped, it's possible to fix it. It's not a complicated process, either. Just watch out for these credit mistakes so you stay on track during the rebuilding process.