Three credit mistakes and how to avoid them

Taking steps to improve your credit score feels like working on a class assignment without instructions. Where do you find your credit score? What actions improve it? How much should I expect it to change in a month? What about six months?

The truth: building credit is confusing. Some actions that would seemingly show your creditworthiness can hurt your score and vice versa. Here are three common credit-building mistakes to avoid. 

Letting too many companies pull your credit. 

Whenever you inquire about a loan, the potential lender will look at your credit to see if you’re a good candidate for a loan. This process is called pulling credit. It can happen at a lot of places like car dealerships, electronics stores, leasing offices, furniture stores and banks. If too many organizations pull your credit in a short period, it can hurt your credit score.  

When you’re shopping for a big purchase, don’t give a salesperson your information until you’re ready to make a purchase. If you need to have multiple people pull your credit, like if you’re shopping rates for car loans, ask if the lender can do a “soft pull.” This is a less-invasive credit pull that gives limited information but allows a lender to give you an estimate. 

Getting rid of all your debt. 

You would think that one of the best ways to show you’re a reliable borrower is to pay off all of your loans. But not having any outstanding credit can actually hurt your credit score. While you don’t want to carry debt unnecessarily, there are things you can do to have manageable debt that you pay off consistently. Prioritize paying off loans with the highest interest rates. Paying those off first will save you from paying more in interest over time which keeps money in your pocket. From there, consider taking on zero-interest, short-term loans for products that you already need. A great example is appliances. If you need a new fridge, you can often get a loan at 12 to 18 months “same as cash.” This means that you’re paying toward the purchase over time without paying any interest on the loan. The catch is that if you miss a payment, an interest rate will kick in. So make sure you’re only using this option for things you truly need and can afford. 

Reaching your credit limit each month. 

If you pay them off each month, credit cards can be a good way to show that you’re a reliable borrower. When you apply for a credit card, you’ll be given a credit limit or the maximum amount of money you can charge to the card each month. That limit isn’t a goal to reach, but rather a threshold you want to fall below if you’re working on building credit. One of the factors that determines your credit score is revolving utilization, or how much of your available credit you’re using on a regular basis. When you hit your credit limit for several months in a row, your credit score will start to fall. There are two things you can do to change your revolving utilization score. The first is spending less money on your credit card each month to decrease how much of your available credit you’re using. You can also request that your credit card company review your financial information and increase your credit limit. If you’ve recently received a raise or changed jobs, submit that information and you may be able to extend your credit limit. But remember, the goal is still to fall well short of your limit, so if you get a bump, still try to charge well below that limit each month.

If you’re trying to improve your credit, partnering with financial coaches like the team at United Housing can help you understand where you are and build a plan for improvement. Connect with us today to get started.