6 common credit mistakes to avoid

These 6 credit mistakes can make it harder to get the best loan rates. See how to improve your credit and check your credit score for free. (iStock)

There are many benefits to having good credit. It's an essential factor in qualifying for the best rates for a mortgage, personal loan or private student loan. A higher credit score can also mean lower monthly premiums for credit-based insurance. And, it can make it easier to get good loan rates if you’re trying to refinance debt or accomplish other life goals.

Avoiding common credit mistakes can help protect your credit score. If you're not sure where you fit on the credit score spectrum, then you should start using a credit monitoring service to track changes to your credit score. Credible can get you set up with a free service today.

    HOW OFTEN DOES YOUR CREDIT SCORE CHANGE?

    6 common credit mistakes

    Here are six common credit mistakes to avoid:

    1. Missing payments
    2. Not checking your credit
    3. Frequent credit applications
    4. High credit utilization rate
    5. Closing credit cards
    6. Early retirement plan distributions

    1. Missing payments

    Payment history is the most important factor when it comes to your credit and accounts for 35% of a FICO score, according to FICO. Missed payments can quickly lead to a subprime credit score and can stay on your credit report for up to seven years.

    Making the minimum monthly payment for loans and credit cards keeps these accounts in good standing and prevents late fees.

    2. Not checking your credit

    It’s important to check your credit report regularly to search for identity theft and fraudulent accounts opened in your name. You can also catch credit reporting errors like inaccurate balances and payments.

    Potential fraud and reporting errors can negatively impact your credit score until you file a dispute.

    With a credit monitoring service, you can get instant alerts on late payments, fraudulent activities, credit score changes and more. Check out some of Credible's partners here.

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    3. Frequent credit applications

    Applying for too many credit cards and loans in a short period is another common credit mistake. Credit applications require hard inquiries that temporarily penalize your credit score and can reduce your approval odds for new accounts.

    Having too many new accounts can also hurt your credit, as you may no longer qualify for the best loan rates. A longer credit history is more likely to result in a higher score.

    4. High credit utilization rate

    A high credit utilization rate on revolving accounts, like a credit card, can negatively impact your credit. Carrying a credit card balance can also hurt it, even if you make the minimum monthly payment and keep the account in good standing.

    Lenders may perceive a borrower with a high credit card balance or large loan balances as more likely to default.

    5. Closing credit cards

    Canceling credit cards that are several years old can be an easy credit mistake to overlook. Having fewer accounts limits the risk of fraud and default but reduces your total available credit and the length of your credit history.

    6. Early retirement plan distributions

    Some people may use retirement funds to pay off high-interest debt quickly. This decision can lead to a credit score increase and help avoid short-term financial trouble. But early retirement distributions are subject to penalties and taxes and can result in future stress.

    To see where you fit in with your credit score, turn to a credit monitoring service. Credible's partners can help you find your credit score, history, alert you to potential fraud, and more.

    WHAT IS CREDIT MONITORING, AND HOW DOES IT WORK?

    How to improve my credit

    If you're looking for ways to boost your credit score, consider these options that could help get you where you want to be:

    1. Refinance debt
    2. Pay your full credit card balance
    3. Monitor your credit
    4. Dispute credit report errors

    1. Refinance debt

    Refinancing your debt with a personal loan at a lower interest rate can help you save on interest.

    You can also reduce the credit utilization rate on your existing credit accounts. Each monthly personal loan payment can establish a positive payment history.

    Finding a cosigner is another option that can help you qualify for better loan terms. Cosigning a loan can also help the primary borrower and cosigner build credit history, according to Experian.

    2. Pay your full credit card balance

    Paying your credit card balance in full every month keeps your credit utilization rate low. You also avoid interest charges on the remaining balance.

    Be sure to make the minimum monthly payment on installment loans like auto loans and personal loans. Each on-time payment establishes a positive payment history and reduces your debt-to-income ratio.

    3. Monitor your credit

    Credit monitoring services provide credit score updates and real-time tracking of your credit report for potential errors and fraud. These services use soft inquiries when checking your credit and won't hurt your score.

    A free service can track your credit report from up to two credit reporting agencies. Paying for credit monitoring can provide access to your credit report from all three bureaus and identity theft monitoring. You can request a security freeze as an extra step to prevent credit fraud as well.

    4. Dispute credit report errors

    Disputing credit reporting errors is free and can help you improve your credit score. When doing so, you will need to file a separate dispute with each credit bureau. These are some of the errors that you may find:

    • Missed payments
    • Personal information
    • Public records

    Bottom line

    Keeping a good credit report helps ensure your credit history is accurate and you get the best credit score possible. Avoiding credit mistakes like missed payments or having frequent hard inquiries will also help you maintain a high score. And having good credit lets you qualify for lower interest rates and better loan terms.

    To ensure you're staying up-to-date with your credit status, enroll in a credit monitoring service. Credible can help you get started.

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