Mistakes That Can Destroy Your Credit

There is no shortage of information (some of it good, some of it bad) on the many different strategies and techniques you can use to attempt to improve your credit. Yet when it comes to earning and sustaining good credit sometimes knowing what not to do is just as important as knowing what you should be doing. And some mistakes aren’t easily reversed.  

1. Assuming Everything Is Fine

When it comes to your 3 credit reports, you cannot just assume everything is fine even if you have great bill paying and credit management habits. Mistakes on credit reports happen and it is up to you to periodically review all 3 of your credit reports for errors and/or fraudulent activity.

Thankfully, checking your credit reports is easy and often free. You can claim a free copy of all 3 reports once every 12 months at AnnualCreditReport.com. There is also no shortage of websites that offer more frequent credit report access for free.

2. Ignoring Errors

Checking your credit reports for errors is not enough. If you discover a credit reporting error or fraud then the ball is in your court. Sometimes even a seemingly small error could potentially have a negative impact on your credit scores.

The good news is that the Fair Credit Reporting Act (FCRA) gives you the right to dispute any item on your credit reports which is incorrect. However, it is up to you to initiate the dispute or to hire someone to initiate the dispute on your behalf, otherwise the credit bureaus have no legal obligation under the FCRA to correct the error because they don’t know that an error exists.

3. Revolving a Balance, or Charging Too High of a Balance

Revolving an outstanding balance on your credit card accounts from one month to the next is not just a financial mistake; it could potentially damage your credit scores as well. Credit scoring models are built to consider your revolving utilization ratio or the relationship between your credit card limits and your credit card balances.

As your balances climb your revolving utilization ratio increases as well. Unfortunately, a higher level of utilization will likely impact your credit scores in a negative way. The best way to manage your credit card accounts is to pay your balances off in full each month, preferably before the statement closing date.  

4. Closing Unused Credit Cards

Did you realize that closing an unused credit card account could actually increase your revolving utilization ratio? Remember, that is not a good thing.

When you close a $0 balance credit card account you might unintentionally cause your overall level of credit card utilization to rise because you’re removing the unused credit limit from the calculation. This increase in utilization could potentially cause your credit scores to slide. Closing a credit card does not cause you to lose credit for the age of the account. That is a myth. However, the account closure is still probably a bad idea in most cases.  

5. Co-Signing…Horrible Idea

One of the biggest credit mistakes you can make is agreeing to co-sign for a friend or family member. Whenever you co-sign for an account you are actually agreeing to be equally responsible for the debt, just as if you had taken it out for yourself. There is no difference and you can’t hide behind, “I was only the co-signer!!!” That won’t work.

Whenever you co-sign, the account is probably going to show up on your own personal credit reports. This means that the payment history of the account, the utilization level (in the case of a credit card), and the young age of the account will all be a part of your credit reports. All of these factors have the potential to impact your credit scores in the wrong way. And if the debt goes into default or is otherwise delinquent, ouch! Co-signing should be completely off limits if you want to protect your credit.