5 Mistakes That Might Be Hurting Your FICO® Scores (And Simple Ways to Fix Them)
May 1, 2024, by Michelle Black
Common mistakes that could be hurting your FICO® Scores
Photo by Marta Nogueira on Pexels
Building good credit can benefit your life in many positive ways. A good FICO® Score could make it easier to qualify for financing products, like loans and credit cards, and to receive better borrowing terms when lenders approve applications.
As you work to earn and maintain a good FICO® Score, it's important to learn about the mistakes you should avoid along the way. When you study common missteps that could damage your credit, it's easier to steer clear of these potential issues in the first place.
1. Late Payments
Payment history has a significant influence on your credit— making up 35% of a FICO® Score. Therefore, when your credit report shows evidence of late payments, those negative items have the potential to cause credit damage.
To make matters worse, late payments can remain on your credit reports for up to seven years. On a positive note, the impact that late payments may have on your FICO® Scores tends to become less meaningful over time. Nonetheless, it's best to avoid these derogatory notations altogether if possible.
The following tips could help you avoid late payments.
- Set up automatic payments with lenders and credit card companies.
- Schedule payment reminders on your smartphone and with your creditors, if available.
2. Revolving a Balance on Credit Cards
Credit cards can be useful financial tools for numerous reasons. A credit card has the potential to help you build credit when you manage the account in a responsible way (e.g., on-time payments, low credit utilization ratio, etc.). Plus, as a credit cardholder you can enjoy fraud protections, a convenient payment method, potential rewards, and other perks.
But carrying a balance on your credit cards from one month to the next is a mistake that could cost you money and negatively impact your FICO® Scores. The ideal way to use a credit card is to pay off the full statement balance on your account by the due date each month. When you pay less than this amount and revolve a balance from one month to the next, you'll have to pay interest charge to your credit card company.
You might also increase your credit utilization ratio when you revolve a balance on your credit cards. A high credit utilization ratio could also negatively impact your FICO® Scores, even if you pay your bill on time every month.
If you're struggling with credit card debt, it's important to try to find a solution to improve your situation. Depending on your situation, a debt payoff plan might be worth considering. Debt payoff plans like the debt snowball or debt avalanche have the potential to help you reduce your credit card balances little by little, saving you money and potentially improving your FICO® Scores along the way. (Tip: If you can find extra money in your monthly budget, you might be able to speed up the process.)
3. Not Checking Your Credit
Forgetting to check your credit is another mistake that could come back to haunt you. It's important to review your three credit reports on a regular basis to confirm that the information is error-free and doesn't show any signs of fraud or identity theft. If you discover credit report errors, you have the right to dispute them with Equifax, TransUnion, and/or Experian.
In addition to keeping tabs on your credit reports, it's also wise to monitor your FICO® Scores. Changes in your FICO Scores may alert you to potential credit problems when and if they arise. And if you're working to improve your credit, monitoring your FICO Scores can help you track your progress.
4. Co-signing
When you co-sign for a friend or family member, it puts your personal credit at risk. As the co-signer on a loan or credit card, the lender will hold you equally liable for the debt. If the primary borrower or account holder stops making payments for any reason, you will be obligated to step in and repay the credit obligation in question.
Additionally, as a co-signer the loan or credit card is likely to appear on your credit reports as well. If the account has any negative payment history associated with it (e.g., late payments, default, collections, etc.), those derogatory items could impact your credit as well.
Even if your friend or family member pays on time, being a co-signer might make it difficult for you to qualify for financing in your own name. Co-signing for a credit card, for example, could affect your credit utilization ratio. And any extra debt that shows up on your credit report could impact your debt-to-income (DTI) ratio when you apply for future loans.
If you want to help a loved one build credit, you might consider adding him or her as an authorized user to one of your existing credit cards instead. This approach could assist your friend or family member in their credit-building goals. However, adding an authorized user isn't risk-free. You should only add a family member or friend to your credit card that you trust since you will be responsible for any charges they make to your account.
5. Closing Unused Credit Cards
Paying off credit card debt can be a struggle. So, it's understandable that some consumers might be tempted to close a credit card after they pay off a large balance to avoid any future temptation to overspend. Yet closing a credit card could have a negative impact on your FICO® Scores.
When you close a credit card, especially an account with a zero balance, it might increase your credit utilization ratio. If your credit utilization ratio climbs due to a credit card closure, your FICO® Scores could decrease in response.
If you're worried about overspending, consider whether alternative solutions might work for you instead. For example, you could lock your credit card away in a safe place at home so it's not readily available for impulse purchases. If you need to close an account for another reason, such as avoiding an annual fee on a card you no longer use, try to pay off all your credit card balances first to avoid a credit utilization increase.
Bottom Line
A good FICO® Score may save you thousands of dollars throughout your life. Therefore, learning common credit mistakes to avoid is important if you want to protect your FICO Scores both now and in the future.
Get your FICO® Score from FICO, for free. No credit card required.
Michelle Black, Founder of CreditWriter.com is a leading credit expert, financial writer, and speaker with nearly two decades of experience. Her work has been featured with major outlets such as Forbes, Reader's Digest, and U.S. News and World Report.