Are You Hurting Your Credit Score? 5 Common Mistakes and How To Fix Them
Recently, my credit score dropped by 25 points overnight due to a common mistake that I made. I often get messages from people experiencing similar sudden drops or just consistently low scores in general, so here’s how you can fix that!
1. Too Many New Credit Accounts
The most common reason for a score dip is opening new accounts, which affects around 10% of your FICO score. Each time you apply for new credit, a hard inquiry is made, temporarily lowering your score. However, this impact is short-term and diminishes after a few months. To manage this, space out your credit applications and avoid opening multiple accounts in a short period.
2. High Credit Utilization
The Amounts Owed factor, particularly Credit Utilization, impacts around 30% of your credit score. It’s calculated by dividing your credit card balances by your credit limits, on both an overall and per-card basis. Aim to keep this below 30%, ideally under 10%. I usually keep mine at 1-2% which has led to the best results in my score improving over time. Recently I became an authorized user on a new card that my wife has, and a balance was reported on this card was higher than usual (around 25%) which caused my score to drop. Luckily, credit utilization does not have a memory under most current credit scoring models, so to fix this we just paid down this balance before the next statement closing date and my score greatly improved back to what it was before.
3. Low Age of Credit
Age of Credit accounts for 15% of your score. It’s influenced the most by the age of your oldest account and the average age of all your accounts. To improve this, start with a no-annual-fee card as your oldest account and avoid closing it. Be patient and limit new credit applications to one every 3-6 months or so to gradually increase your average age of credit over time.
4. Lack of Credit Mix
A diverse credit mix makes up 10% of your score. While it's good to have different types of credit (credit cards, mortgages, car loans), don’t open new types of accounts just for the sake of it. Start with a credit card and add other types of credit as needed over time. Patience is needed with this factor as well.
5. Missed Payments
Payment history is the most important factor, affecting 35% of your score. Always pay your bills on time. Set up autopay for fixed loans and reminders for credit cards. If you miss a payment, make it within 30 days to avoid it being reported to the credit bureaus which would negatively impact your credit score. Multiple late payments can severely damage your score, so stay vigilant!
My Personal Strategy
To maintain a high score, I focus on three things:
Be patient and avoid too many new accounts at once.
Keep Credit Utilization low.
Start with no annual fee credit cards to help Age of Credit.
Be patient and open other types of credit only when needed.
Never miss a payment by setting up autopay and reminders.
