Sometimes we spend so much time trying to boost our credit score that we don’t realize that we might be hurting it instead.
Your credit score is typically made up of a few different parts, including:
Payment history: 35 percent. Amounts owed (or credit utilization): 30 percent. Length of history: 15 percent. Types of credit: 10 percent. New credit: 10 percent.
While each part can impact your score differently, it’s important to pay attention to all of them. Here are some ways you could be hurting your score instead of helping it.
1. Not checking your credit report
While your score is a three-digit number that shows your creditworthiness, it’s your credit report that details your credit responsibility.
Your report is a detailed history of your credit since you began your credit journey. For some, it starts with student loans. For others, it could be a credit card.
You can get a free credit report from each of the three major credit bureaus — Equifax, Experian and TransUnion — once every 12 months to see if there are any red flags or errors. You can also get your credit report for free from Bankrate.
Similarly, not checking your credit score often to evaluate how you’re doing can also hurt you. Chelsea Hudson, personal finance expert at TopCashback.com, says it’s good to review your score and report to take care of any discrepancies.
“I always recommend checking your credit report every few months to access your purchasing habits and double-checking to make sure your information is correct to guard yourself against identity theft,” Hudson says.
2. Only making minimum payments
If you’re constantly hitting your credit limit, you become a liability to lenders. Consumer savings expert Andrea Woroch says you should never use more than 30 percent of your total balance across all credit cards, otherwise known as your credit utilization.
“Those who keep their utilization percentage low typically have higher scores than those who max out their credit cards constantly,” she says. “Maintaining a low balance will not only help you manage timely payments, but it also helps your credit score.”
If you’re constantly paying with your credit card and carrying a balance every month, you’re not only accruing interest, you’re keeping your credit utilization high. Once you go beyond 30 percent utilization, Woroch says your credit score can take a dip.
RELATED: Check out these financial tips you can't afford to ignore:
13 pieces of money advice you can't afford to ignore
13 pieces of money advice you can't afford to ignore
1. Pay yourself first
"People still don't grasp the fact that they need to save a dime out of every dollar," author and self-made millionaire David Bach told Business Insider in a Facebook Live interview. He said the average American who's saving money is saving just 15 minutes a day of their income, when they should be saving an hour.
Bach noted troubling research from the Federal Reserve that revealed nearly half of Americans wouldn't have enough money on hand to cover a $400 emergency. Yet, he continued, millions of those people will buy a coffee at Starbucks today and expect to buy the new $800 iPhone next year. Americans have money, he says, but we aren't saving it.
So get on the "pay-yourself-first plan," as Bach calls it, and automatically save an hour a day of your income. "When that money is moved before you can touch it, that's how real wealth is built," he said.
2. Beware of lifestyle creep
There's a lot of pressure in your 20s and 30s to keep up with your friends. Maybe they're buying a nicer car or a house, but if you're not in the financial position to keep up, don't try.
"I always refer to it as 'lifestyle creep' because one of the big things that people can do — that's an advantage to them — is keep their fixed expenses somewhat stable and reasonable for what they make," Katie Brewer, a Dallas-based certified financial planner who founded Your Richest Life, told Business Insider.
Planning for your recurring costs — like mortgage, rent, a car payment, and insurance — ensures that expenses won't creep up on you and derail your financial future. Of course, Brewer said, if you're making good money you should have the freedom to spend it how you wish, as long as your lifestyle doesn't overtake your income.
In short: Live below your means.
3. Take advantage of an employer-sponsored 401(k)
Putting money into a retirement plan as early as you can, no matter the amount, is a smart and easy way to pay yourself first.
If your company offers a 401(k) plan, take advantage of it. In some cases, employers will offer a contribution match. "That means the company contributes a set amount — say, 50 cents for a dollar — for every dollar you contribute up to a specified percentage of your salary," Beth Kobliner writes in her book "Get a Financial Life: Personal Finance In Your Twenties and Thirties."
"That's free money, equivalent to a 50% or 100% return. There's nowhere you can beat this!" she writes.
Plus, 401(k)s allow you to contribute your pre-tax money, meaning the more you contribute now, the greater the growth (thanks, compound interest) and the more money you'll have down the road, though you will be taxed when you withdraw the money for retirement. For 2017, the maximum contribution to a 401(k) is $18,000.
4. Invest in the stock market, just don't try to time it
"No one can time the market, so know that if there is a decline, it's going to bounce back. Over time, being in the market pays off more so than staying out of it," Michael Solari, a certified financial planner with Solari Financial Planning, told Business Insider.
Sometimes known as "set it and forget it" investments, these diversified funds automatically adjust their asset allocation and risk exposure based on your age and retirement horizon. Early on, when the need for that money is still a couple decades away, the fund will adopt a more growth-focused strategy. As you ripen toward retirement, it dials back the risk.
You may not get the average annual return of 11% in your target date fund — given you'll be invested in a blend of stocks, bonds, and alternative assets — but if you get even 6% per year, an original $10,000 investment will be worth more than $32,000 in 20 years without you having to do a single thing. Compare that with $12,200 in your high-yield savings account or $10,020.20 in your traditional savings account.
kid put coin to piggy bank on the vintage wood background, a saving money for future education concept and copy space for input text.
5. Build an emergency fund
Let's face it: It's really not a matter of if you'll need to fork over cash for a car or home repair, child expense, or medical emergency, but a matter of when.
"No matter how well you plan or how positively you think, there are always things out of your control that can go wrong," Bach writes in his bestseller "The Automatic Millionaire."
"People lose their jobs, their health, their spouses. The economy can go sour, the stock market can drop, businesses can go bankrupt. Circumstances change. If there's anything you can count on, it's that life is filled with unexpected changes," he wrote.
Most financial planners suggest stockpiling anywhere from three to nine months worth of expenses in an emergency fund that you can turn to when in need. If you don't have savings at the ready, you run the risk of having to rely on family or friends for help, or worse, falling into debt.
6. Pay off your credit card balance in full every month
Sometimes a credit card can feel like free money, until you're slapped with the bill. Even then, most credit cards only require you to pay 1% to 3% of your balance each month, which can be an alluring prospect if your budget is tight. But consistently paying the minimum could cost you a fortune in the long run, damage your credit score, and affect your ability to qualify for a mortgage.
Not only did she swipe her credit card with no reservations and adopt the bad habit of paying just the minimum amount — Torabi said she once forgot to pay the bill all together.
She remembered incurring a late fee that showed up on her credit report and gave her a true "wake-up call." The incident happened before she "realized the power of automating" her bills, a practice that can save you money on late fees and relinquish you from remembering due dates and the embarrassment of missing a payment.
Though you're "never going to kill your financial future" by accumulating money, Brewer says, "you're losing out on opportunity costs by having money sitting around ... especially if it's sitting in an account making barely anything in interest."
If you're risk-averse, one way to manage savings overflow is to move your money into a high-yield savings account, where you could be earning 1% interest on your money, rather than the 0.01% earned in a traditional savings account. Or, as previously mentioned, stick it in a low-cost target date fund and see your returns balloon over time, with little to no work required.
8. Have more than one credit card
It may seem financially reckless to have a wallet full of credit cards, but it's actually smart. According to John Ulzheimer, credit expert at CreditSesame.com, having a single credit card can damage your credit score, thanks to something called your credit utilization ratio — that is, how much of your available credit you're actually using.
"That percentage is very, very influential in your credit score," explains Ulzheimer. "People say that you're in good shape if you keep your utilization within 50% of your available credit, or 30%, but really, it should be below 10%."
Available credit counts all the cards you have: If you have one card with an $8,000 limit and one with a $6,000 limit, your total available credit is $14,000, even if you only spend $1,000 a month. With a single card, you have no unused credit cushioning the impact of your spending. The closer you get to your limit, the harder the hit on your credit score.
"Say you have $5,000 of credit card debt at an 18% interest rate. Say you happen upon $5,000 of money. If you take some of the advice out there, and split the use of that $5,000 (half to establish an emergency fund, half to pay down credit card debt), you still have $2,500 of credit card debt and $2,500 of money sitting in cash.
"The $2,500 of credit card debt at an 18% interest rate costs you $450 a year. The emergency fund earns almost nothing in interest. So you're out $450."
Bottom line: You'll save more paying off the debt than you'd earn if you invested it, whether in a high-yield savings account or the stock market.
10. Always be insured
Every American citizen is required to have health insurance, or be fined hundreds of dollars by the IRS each year. Kobliner advises signing up for insurance should be "your No. 1 financial priority" because it'll protect you from unforeseen accidents or illness, and prevent yourself or your family from going bankrupt in the case of an emergency.
If your employer offers health insurance, take it, Kobliner says. It's almost always cheaper than buying a policy on your own (but keep in mind that you can be covered by your parent's insurance until age 26). Before signing up, though, make sure you understand the cost and extent of the plan, including your deductible, or how much you'll be paying out-of-pocket before insurance takes over.
If you do end up needing to purchase a policy on your own, head over to healthcare.gov to compare plans and pricing.
11. Track your spending
Business Insider's Libby Kane has written, edited, and read hundreds, maybe thousands, of stories about money during her career, and says she's learned that "the best, most critical first step you can take to improve your finances is to track your spending."
Keeping tabs on where your money is going, whether fixed expenses like rent or mortgage payments and transportation costs or discretionary spending like dining out and travel, is a crucial part of mastering your money.
"Whether you owe money to the tax man at the end of the year or not, it's always a smart move to file your taxes," Kobliner advises.
And be aware that you can save money on taxes by taking advantage of deductions, or the specific expenses you're allowed to take out of your income before calculating your owed taxes. The standard deduction — $6,300 for singles and $12,600 for couples — is a good place to start, Kobliner says.
You can also itemize deductions to maximize your savings by listing specific deductions, including expenses for housing costs like mortgage interest or property taxes, and charitable donations, or making use of tax credits.
And if you don't file your taxes? You could pay a penalty fee of at least $135, plus interest on the money you owe, and lose ground on your credit report, among a host of other financial consequences.
13. Be patient
When bestselling author and motivational speaker Tony Robbins asked billionaire Warren Buffett a few years ago, "What made you the wealthiest man in the world?" Buffett replied, "Three things: Living in America for the great opportunities, having good genes so I lived a long time, and compound interest."
"The biggest thing about making money is time," the investor, who's now worth more than $76 billion, said in a recent HBO documentary about his life. "You don't have to be particularly smart, you just have to be patient."
In his latest letter to Berkshire Hathaway shareholders, Buffett announced that he was on his way to winning a $1 million bet he made in 2007 that his investment in an S&P 500 index fund would outperform five hedge funds over a decade.
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3. Paying bills late
Regardless of what bills you have, missing payments can crush your credit score.
“Those who constantly pay late show poor money management skills and this signals a risk to potential creditors,” Woroch says. “While many utility providers may not report the occasional late payment, those who regularly pay late face serious implications when it comes to their credit score.”
Payment history makes up 35 percent of your credit score. Late or missed payments may cause a huge drop.
“When you miss a payment, you are viewed as an unreliable borrower,” Hudson says. “Not only will your credit score and history be impacted, but you’ll also be subjected to higher interest rates.”
4. Opening and closing accounts
Perhaps a while back you opened a rewards credit card for the attractive signup bonus, but now you want to close the account. Consider this before doing so.
In addition to opening many different accounts at once, closing accounts could hurt your credit score, too.
“Closing old cards with great history is not a good strategy,” says Aris Jerahian from Orange County’s Credit Union. “It indicates you are no longer demonstrating management of that credit line which could have a negative impact on your credit line.”
The length of your credit history accounts for about 15 percent of your overall credit score. The longer your history, the better your creditworthiness is.
Additionally, opening an account can cause a temporary dip in your credit score due to hard inquiries, which are a part of the new credit component of your credit score. Hudson advises against applying for many different accounts, which can completely tank your score.
“You want to limit as many hard inquiries as possible since they do affect your credit score,” she says. “Although hard inquiries are only 10 percent of your credit score, it can make the difference between a perfect score and a good score.”
5. Avoiding credit entirely
If you’re trying to give your credit score a boost, you might think not using credit at all will show how responsible you are. But it actually has the opposite effect.
“Some people think they are doing (their) credit scores a favor by not borrowing or charging anything,” says Freddie Huynh from Freedom Financial Network. “Credit agencies rely on past payment history to gauge how borrowers will do in the future. If you don’t borrow, they have no information to rely on.”
If you don’t use credit at all, you might be credit invisible. This is where you don’t have enough of a credit history to generate a score. This can create challenges — if you don’t have a credit history, lenders can’t trust your creditworthiness.
There are plenty of ways to use credit responsibly, from credit cards to loans. As long as you’re paying your bills on time, in full every month, you’re on your way to a great credit score.