We hear a lot about the importance of having good credit, but how often do we take the time to understand the behaviors that impact our credit scores? Sure, we all know that if we charge up a storm and don't pay our bills, our credit scores will get dinged. But here are three other ways you might be destroying your credit without even realizing it.
1. Paying your bills late
Failing to pay your bills on time is one of the quickest ways to destroy your credit. The good folks at Credit.com report that a payment that's 90 days or more past due will significantly damage your credit score for up to seven years. It doesn't matter if you're late paying a $20 bill or a $200 bill. Once your tardiness is documented, it'll stay with you for a long time, so if you think being late on a small bill won't matter in the long run, think again. Furthermore, while late payments that don't reach the 90-day mark aren't quite as bad for your credit, a series of 30-day late payments can be a black mark on your record as well.
Assuming there's no cash flow problem at play, the easiest way to avoid being late is to set up automatic bill payments through your individual billers, your credit card companies, or your bank. Not having the money to pay your bills on time is a different story entirely, at which point you ought to sit down, review your spending habits, and make some serious cuts until your financial situation improves. While you can't exactly avoid paying rent or buying groceries, you technically don't need cable or Internet service.
2. Failing to check your credit report
Many of us don't bother to check our credit reports, but here's a good reason to be more proactive: 20% of credit reports contain errors, according to a 2013 Federal Trade Commission study. If yours is among them, you could wind up paying higher interest than necessary for a mortgage or home loan. Imagine you're applying for a $20,000, five-year auto loan and are approved for 6% interest because of your allegedly poor credit. At that rate, your loan will cost you $387 per month, or $23,200 over the life of the loan. Snag a 3% rate instead, and your monthly payment will be just $360 a month, or $21,600 over the life of the loan. In our scenario, you'd lose $1,600 by not spotting and correcting a credit report error.
By law, you're entitled to a free copy of your credit report every 12 months from each of the three major bureaus, TransUnion, Experian, and Equifax. If you haven't read your own credit report this year, stop what you're doing, get a copy, and study it for errors. An hour or two of legwork to clear up a mistake could save you thousands of dollars down the line.
3. Using too much of your credit line
When credit card companies offer you a specific credit limit, they do so with the hope that you'll take advantage of that limit as much as possible. The reason? They make money from interest charges. However, using too much of your available credit can seriously damage your credit score. A high credit utilization ratio, which is the percentage of available credit you're using, can damage your credit score just like missed or late payments. Ideally, you should keep your credit utilization ratio to 30% or lower. If your credit card company extends you a $10,000 line of credit, make sure not to charge more than $3,000 in total at any given point in time. Exceeding that mark could make it more costly for you to borrow money in the future.
Remember, poor credit doesn't just impact the amount of interest you'll pay on a loan, or your ability to get one in the first place. In some cases, it could even have a negative effect on your career. Some companies run credit checks on potential employees, which they're allowed to do by law. Say you're applying for a role that comes with a $10,000 salary boost and are denied because your prospective employer doesn't like how your credit report reads. Suddenly, your poor credit isn't just costing you money in higher interest payments; it's costing you $10,000 in salary as well. So while it may take some effort, protecting your credit can pay off in more ways than one.