One of the most important matters we deal with in our financial lives is our credit.

 

Credit is the ability to borrow money to pay for some costs.

 

Why do we use credit?

 

We use it to buy things we want or need but couldn’t otherwise afford.

 

But why is credit so important?

 

It gives us the chance to borrow money when we need to.

 

This determines if we can get approved for loans and credit cards.

 

We can lose that opportunity to borrow if we hurt our creditworthiness.

 

When I was younger and first started paying bills, I began to learn about the real world.

 

During that time, I made my fair share of mistakes, especially ones that hurt my FICO score.

 

I’ll tell you the common mistakes that can hurt our credit rating.

 

1. Late payments and unpaid bills

 

This one is obvious. Bills and more bills are a normal part of our lives. It’s a responsibility we can’t avoid.

 

What we know or must know is how paying our bills affects our track record.

 

Those credit card and loan payments have the biggest effect on our credit score.

 

Although the other bills don’t help our credit score, not paying them on time can hurt it.

 

They get sent to collections if they are overdue by 30 to 60 days.

 

If you don’t pay what you owe in full, your creditworthiness won’t look good.

 

Your FICO can drop as much as 50 to even 100 points due to late payments!!

 

It’s better to pay the bill collector the full amount than a part of it even though you can settle for less.

 

Keep in mind that paying the minimum amount on your credit card doesn’t get you off the hook!

 

Choosing small payments over full ones only adds to the debt. So, the cardholder will have trouble paying off the amount.

 

2. Excessively applying for credit or debt

 

When you ask for credit or a loan, your credit score goes down right away because the lender has to check your credit report.

 

We know that it’s never a good thing to be late on payments or not pay off debts.

 

But it’s also bad when you continue to pile on debt, and your credit score keeps going down as a result.

 

When this happens, your credit history won’t look so great.

 

Now, it’s not a bad idea to borrow money to buy a house, get a new car, or build up your credit. Just remember that your score will briefly drop. But that won’t last as long as you keep paying those regular bills.

 

Still, it’s not good to keep asking for more and more debt, especially debt you don’t need at all. Your credit score will keep going down because more and more people are checking your record.

 

3. Applying for loans and credit with bad timing

 

This is a big deal!

 

It does matter when you seek debt.

 

You see, the length of your credit history, or the average age of your credit, is one of the things that affects your FICO score.

 

What does that mean?

 

It’s the average time you’ve had credit.

 

If you got 3 credit cards in the same month and held each one for 6 years, your average credit age would be 6 years.

 

Say you get those same 3 credit cards. But instead, you’ve had your 1st card for 6 years, the 2nd one for 4 years, and the 3rd for 2 years. In this case, your average credit history would be 4 years. We would add the years together (6, 4, and 2) which would give us 12, and then we divide 12 by 3 (for 3 cards) to get 4 years.

 

The problem is that your FICO score would go down along with your average credit year. Both move together in the same direction.

 

It’s not a good idea to get credit cards at different, more spread-out times like this. The reason for this is that this will reduce your average credit length and FICO score for each card that you get.

 

Your credit background and score will be better if your average credit age is longer.

 

But your credit record and score will be less good if your average length of credit is short or getting shorter.

 

4. Canceling credit card accounts

 

Yes! If you cancel your credit cards after getting them, your FICO score will dip.

 

This may be a surprise for some of you!

 

Sure, you may want to cancel a credit card you’re not using, but this can actually work against you.

 

How so?

 

We already know that the average age of your credit is one of the things that goes into your credit score.

 

Consumers often make the mistake of closing out a credit account. This will make their score worse.

 

When you close a credit card account, your score and average credit age go down. Your average credit age also affects your credit score.

 

Let’s use the same case as before. You still have the same 3 cards, but this time you canceled the 3rd one you had for 2 years. What did this cancellation do? It actually cut your credit length to 3.33 years. We determined this by adding the lengths of the 1st and 2nd cards and including 0 years to the 3rd card.

 

Wait, why are we associating 0 years to the 3rd card?

 

You used to have this card, but you canceled it. So, you don’t have an account on it anymore.

 

But couldn’t we just leave out the information from the 3rd card when we figure out the average length?

 

It’s not quite that simple. When you close a credit card account, you also close the credit limit that came with it. One way to improve your credit report is to have a bigger credit limit. If you lower the credit limit, your FICO score can go down.

 

Remember that your credit history keeps track of everything you owe and how much credit you have. So, it will also show on your report that you closed a credit card account.

 

You pretty much have to maintain the credit cards you get for eternity! That’s like signing your life away to the exact cards you choose! (Ok, that might sound a little extreme.)

 

But you get what I mean. You must keep the cards you pick and never close your accounts.

 

When you apply for credit, do research on the cards that would suit you the best and keep those cards as long as you live!

 

5. Unable to pay back the debt

 

The worst financial situation is when you have so much debt that you can’t make the payments.

 

This can lead to a default or, worse, bankruptcy!

 

People often make the mistake of buying things on credit without having enough money to pay them off.

 

It’s never a good sign when the rate at which you buy things on credit goes up faster than the rate at which you make money. This is how you fall behind on your bills.

 

Credit card owners often think of their cards as a sign of their wealth. They can easily get caught into this debt trap if they don’t spend wisely and control their buying urges.

 

People who pay mostly with credit cards are more likely to overspend than those who pay with cash.

 

Another circumstance that often creates financial difficulties is job loss or job hopping.

 

If you change jobs a lot, this can affect your credit history.

 

Yes, I know that sounds strange.

 

But keep in mind that if you want to build up your credit, you need a steady source of income.

 

When you apply for debt or credit, lenders don’t like to see that you’ve been changing jobs a lot in short periods of time. If they see this, they’ll question how stable your income is.

 

This is important for them because they want to know that consumer’s income range.

 

If a person hasn’t worked for the same company for years, it’s hard to know if he or she has a stable source of income. To pay off all debt, you need income, but it’s easier to make a budget when you know your income limit.

 

But what if you’re unemployed?

 

How will you be able to pay back your debts if you aren’t making money?

 

This can start a dangerous cycle that makes it hard to pay back debt, which will hurt your track record and FICO score.

 

These are the most common mistakes. Because of this, it’s important to get the word out. This can help us all make smarter decisions for how to deal with our credit.

 

Don’t feel bad if you’ve made any of these mistakes! I, too, have made them and learned from them.

 

Check out his post here if you want to learn how to build up your credit quickly.