The 5 Most Damaging Credit Blunders

by Michelle Vullo Pastor, MBA, Accredited Financial Counselor   

Jack and Ann felt confident that their credit was in great shape, but when they tried to buy their dream house, they found their credit scores were much lower than they thought. In fact, with their low credit scores, they wouldn't qualify for the lowest interest rate, so their monthly mortgage payments were much higher than they wanted.

They couldn't understand what had blemished their credit so badly, but it turns out that it wasn't one credit blunder they had made. They had made many very common credit mistakes that damaged their scores. You may also have made these mistakes without realizing that your credit score has plummeted as a result.

1. Paying a bill late by a day. Paying a bill late, even if it's only by one day, can have a huge impact on your credit score. Be aware that just one late payment can drop your credit score by 100 points, and depending on the creditor, your late payment may be reported to the credit reporting agencies even if it's only late by a day. That's where your credit mistake will lead to trouble for your credit score.
2. Your credit score is an indicator of how likely you are to pay your bills on time, and the most weight is placed on your payment history for the last two years. That's why it can take two years to recover fully from this type of credit blunder. If you accidentally pay a bill late, especially if it's only by a day, call your creditor and "beg forgiveness." If it's your first offense, they may drop the late charge, but more importantly, be sure to ask them not to report you to the credit reporting agencies.
3. Closing out unused accounts. Common sense says you should close credit card accounts that you haven't used in a while, but if you're trying to keep your credit score at its best, this can be yet another credit mistake. A large part of your credit score is determined by your credit utilization rate or, in other words, how much of your available credit you're using. To do that, all of your credit card balances are added up, along with all of your credit limits. The percentage of your balances to your total credit is then calculated.
   
   For best results, you want your balances to be below 30% of your credit limits. For instance, if all of your credit card limits added together total $10,000, you want to make sure that your balances when added together are below $3,000, or 30%. Going above a 30% utilization rate can happen if you close out unused credit card accounts, because it reduces your overall credit limits. In the example above, if you close an account with $2,000 in available credit, your utilization rate will automatically climb to 38%, which will hurt your credit score.
   
   What should you do? Keep the accounts open, but keep the credit cards in a safe place. If you have a good credit history with an account, use the card once every six months for small purchases, just to keep that account's good credit history in the mix.
4. Overutilizing credit cards. Keep your utilization rate as low as possible on each credit card. The goal is to pay your credit cards in full every month, but if you can't do that, keep the balance as low as possible and always below 30% of your credit limit. If it's impossible to keep your utilization below 30%, ask your credit card company to increase your credit limit to make up for it.
5. Not checking your credit report. Everyone knows to keep an eye on their credit report to spot credit errors, mistakes and signs of identity theft that can send a credit score spiraling down, but they may not know the best way to do it.
   
   At www.annualcreditreport.com, you can request a free credit report from each of the three credit reporting agencies once every 12 months. That means that you can check the information from one of the three credit reporting agencies for free every four months. To rotate your credit reports and keep an eye on all your credit reports throughout the year, pull your credit report from Experian today; request one from Equifax four months from now; then get your TransUnion report four months after that.
   
   If you see any errors or fraudulent activity, investigate and dispute them right away. Although your credit report doesn't give you your credit score (you have to pay extra to get it), you can click here to estimate your credit score.
6. Chasing credit. Every time you apply for credit, your credit score takes a hit. You can get two free inquiries per year, but after that, each one will ding your credit score four to seven points. Apply for credit sparingly and only if you need it.