6 Credit Mistakes Even Those With Stellar Scores Can Make

woman shocked at reading her credit card bill / bank statement
By Meghan Rabbitt

"Good credit can become bad credit in as little as a month," says John Ulzheimer, a credit scoring and reporting pro who's worked for FICO, Equifax and Credit.com. "There are too many under-the-radar factors that can influence your score to just assume you'll sail through the years with great credit."

Think you've got a handle on what can make or break your score?

We're exploring six missteps that even folks with healthy credit can make -- and then offering up advice from credit experts on how to avoid them and maintain that fantastic FICO score you've built up.

Mistake No. 1: You Don't Check Your Credit Reports

What you're risking: No matter how impressive your money habits, failing to regularly pull your credit report could lead to credit score problems.

"That's where the three big signs of identity theft will show up: an address where you've never lived, a new credit inquiry you didn't make and a new account that doesn't belong to you," Ulzheimer says.

So if you don't periodically eyeball this document, you won't spot these clues -- or other potentially damaging errors, like an inaccuracy regarding the current balance of your mortgage.

The credit-savvy move: You can request a free credit report from each of the bureaus -- Equifax, Experian and TransUnion -- every 12 months, although Ulzheimer suggests pulling one from each agency three times a year. Additionally, you can seek out sites that supply registered users with free reports more often, such as CreditSesame or CreditKarma.

"New accounts can take 30 days or longer to show up on your report," he notes. "If you don't check on a regular basis, it's less likely that you'll catch identity theft."

Once you have your report in hand, scan for misinformation like foreclosures, a tax lien, accounts you never opened and late payments that never occurred. These are all errors that could lower your score -- but that can be easily fixed by calling an agency to file a dispute.

"That obligates the credit bureaus to perform an investigation," Ulzheimer says. "After your credit file is corrected, any future score pulled will take into account the new and correct data."

When you know you have a great credit score, it's easy to sit back, relax and trust it will stay that way.

After all, the habits that got you those enviable digits -- like paying your bills on time and keeping your debt under control -- are probably second nature at this stage.

Reality check! Just because your credit score is something to be proud of now doesn't mean it can't drop in the future.

Mistake No. 2: You Overestimate the Power of a Single Score Factor

What you're risking: You think your FICO score is golden because you've never made a late payment. But your sister insists her stellar score came from being debt-free. Who's right?

It's a wash. While it's true that each of these habits is an important ingredient, they're not the only ones that matter.

"Too many people don't know about all of the components that go into their score," says Mary Beth Storjohann, a certified financial planner and founder of Workable Wealth in San Diego. "When you're not educated about this, it's more likely that you'll make a mistake without even realizing it."

Th credit-savvy move: To ensure your misunderstanding doesn't come back to bite you, get familiar with these five important factors (from FICO):
  • How timely -- or not -- you are when paying bills accounts for 35 percent of your score.
  • The amount of money you owe vs. your credit limits -- aka your utilization ratio -- makes up 30 percent. Ulzheimer recommends keeping this number under 30 percent, but says the optimal figure is less than 10 percent. (Here's how to calculate yours.)
  • The length of your credit history influences 15 percent of your score, which explains why pros generally suggest keeping all of your accounts open.
  • A balanced mix of accounts, including both revolving credit (such as credit cards) and installment credit (such as mortgages) makes up another 10 percent.
  • The number of new credit applications accounts for the last 10 percent.
"These elements don't interact," Ulzheimer notes. "You can be doing well in the payment history category but [lose points because] you have a ton of debt relative to your limits."

"As much as you can, even after marriage, it's wise to maintain credit independence, as it's very difficult to detangle co-liability."

Mistake No. 3: You Co-Sign on Loans

What you're risking: Co-signing a loan may seem so harmless. After all, it's not like your loved one can't make the payments (or so they say). They just need you -- and your good credit -- in order to qualify.

But Stacy Francis, a certified financial planner and president of Francis Financial in New York, says this move can be a risky one.

"Co-signing means your credit reputation is now subject to influence, based on the other person's ability to make payments," Francis says. For example, if you've co-signed your girlfriend's car loan, and she's late on a few payments, those bad marks will show up on her credit report and yours.

And even if the person can afford their payments, their debt still reflects on you. Lenders will consider it a liability when calculating your debt-to-income level, which could mean that you miss out on low interest rates when applying for new loans in the future.

The credit-savvy move: If you feel strongly about co-signing a loan for a child, spouse, partner or friend, be prepared to jump in and assume the payments at any point during the life of the loan. "If you're willing to do that, go ahead," Francis says.

But if that doesn't sit well with you, listen to your gut. "As much as you can, even after marriage, it's wise to maintain credit independence, as it's very difficult to detangle co-liability," Francis says.

Ulzheimer has a tip for handling this delicate situation: "Suggest the person build up his own credit -- and ability to qualify for a loan alone -- by applying for a secured credit card."

Mistake No. 4: You Close Long-Standing Credit Accounts

What you're risking: You're out of debt (at last!), and decide to eliminate temptation by closing the credit card that got you into overspending trouble in the first place. Good idea, right?

Believe it or not, this well-intentioned move can ding your score. Since 15 percent of your score is based on the length of your credit history, if you close a card that you opened 10 years ago, you're shortening your credit span by a decade in one fell swoop.

Plus, closing an account can send your utilization ratio through the roof. For instance, let's say you have two cards, each with a $5,000 limit. On one, you owe $2,500, while the other is balance-free. Right now, your ratio is 25 percent -- but if you close the second card, it jumps to a potentially credit-damaging 50 percent.

The credit-savvy move: It's best to leave cards open, even after you've zeroed out the balances, Francis says, especially those you've had for years.

The one exception: if you have a card -- that's not your oldest account -- with a high annual fee. "The price of a fee on a card you never use could be more damaging to your budget than the temporary credit score dip you might experience," Francis explains.

Still afraid you'll slip back into your splurge-happy habits? Freeze your spending (literally!) by placing your card on ice, instead of in your wallet.

Mistake No. 5: You Defer Payment With Financing Deals

What you're risking: When something seems too good to be true, it typically is -- a notion that applies to those year-long zero-percent financing offers available at furniture and electronics stores.

For starters, big retailers are seen as "lenders of last resort," Francis explains. Translation: This credit isn't ranked as favorably as what you could qualify for with one of the major credit card companies.

Plus, financing the fancy speaker system you've had your eye on means you're applying for -- and taking on -- more debt.

"Every time you apply for credit, your score gets dinged and will take some time to come back," Francis says. "If you're already in credit card debt, this will only make your debt-to-limit ratio worse."

"The best time to ask for a credit limit bump is when you know you've got great credit, and when you have a good, solid income."

The credit-savvy move: Steer clear of these offers -- and save up and buy big-ticket items, like TVs, outright.

While you're at it, remember to say no to pushy salespeople who try to talk you into signing up for a slew of department store cards -- even if they come with a big discount.

"When you apply for multiple cards in a short amount of time, you're loading your credit report with a bunch of inquiries, which can also hurt your credit score," Ulzheimer says.

Incidentally, you're also loading your credit report with newly added accounts (if approved). "Since the average age of your accounts plays into your credit history, this can do some damage to your score," he says. "The older the age of the account, the better."

Mistake No. 6: You Don't Ask Credit Issuers to Report Your Limits

What you're risking:
Now that you're committed to regularly reviewing your credit report, double-check that the limits listed match what's on your credit card statement. While companies always report your debt, they may not be consistently updating your maximum available credit limits.

"If you have a $20,000 limit that's been reported as $10,000, plus about $5,000 of debt, the credit bureaus will think you're using a much bigger amount of your overall limit," Francis says. "This is a mistake that's rarely talked about."

The credit-savvy move: If you notice your credit issuer isn't accurately reporting your limits, call a customer service rep and ask them to do so.

However, keep in mind that, unlike the credit bureaus' obligation to fix errors, creditors don't have to report your limits -- and you can't force them to, says Ulzheimer. "In fact, your credit card company has no obligation to report anything [to the credit bureaus]," he says. So if you find yourself in this situation, consider moving your business to a card that will.

You can also take this opportunity to ask the company to increase your credit limits. "The best time to do this is when you know you've got great credit, and when you have a good, solid income," Francis says. "These are the most important metrics credit card companies consider [when raising limits]."

Ulzheimer suggests asking for a modest increase -- just a couple hundred dollars. This way, provided you're in good standing, you're more likely to be approved. Repeat the exercise a few times a year, inching up your limits little by little.

Before you know it, you could be making big strides in the utilization-ratio department -- and have the healthy credit score to prove it.
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