What Are the 6 Biggest Credit Score Mistakes?

When you are building your credit score, avoid the biggest mistakes of making late or minimum payments, maintaining high credit usage, applying for credit accounts too often, closing old accounts, failing to monitor your score, and cosigning for credit for others without understanding the risks. Let’s take a closer look at why these credit score mistakes are costly and strategies to improve your score.

Your credit score shows lenders how likely you are to pay back borrowed money on time, and a good score improves your likelihood of credit approval along with lower interest rates. Credit scores are three-digit numbers ranging from 300 to 850 and based on a combination of past credit payment history and reports from credit bureaus and lenders. Having a higher score usually results in lower rates on loans and credit cards, being more likely to get approved for housing, and having lower deposit requirements for utility services and insurance. Because your credit score impacts other areas of your life besides credit approval, you’ll need to avoid these mistakes to improve your score.

1. Making late or minimum payments

The biggest factor in determining your credit score is payment history, a factor that determines 41% of your score according to VantageScore 4.0.¹ Paying at least the minimum amount due on time consistently is the best habit to build your score. To improve your score even more, strive to pay more than the amount due. Paying your balance down reduces your credit utilization rate, or how much credit you have available to use.

2. Maintaining high credit utilization

The ratio between the amount of credit that you’re carrying monthly and the total amount available is your credit utilization rate, and it accounts for 20% of your score. You can find this ratio by dividing your credit balances by the total limits. For example, if your current balance is $4,000 and your combined limits are $10,000, your utilization is 40%. Lenders prefer utilization ratios below 30% as higher ratios mean you’re relying too heavily on credit usage.

3. Applying for multiple credit accounts too often

When you apply for a loan or credit card, a hard inquiry appears on your credit report. Every time a hard inquiry is made, your credit score is lowered a few points, so it’s recommended to space out applications by at least six months.² However, multiple inquiries when shopping for an auto loan or mortgage within a short window counts as a single inquiry. Lenders understand that you’re shopping around for the best rate. VantageScore 4.0 groups all hard inquiries as one that occur within a 14-day window, while FICO® Scores uses a 45-day window.³ Checking your credit score and report also doesn’t impact your score. When applying for a loan or credit card, or line of credit, talk to your loan officer to understand how credit inquiries work and the time constraints to avoid a negative impact on your score.

4. Closing old credit card accounts

Your credit age and mix make up 20% of your credit score, so it’s better to keep accounts open—if the card doesn’t have an annual fee. While available credit only makes up 2% of your score, avoid closing old accounts since it reduces your available credit, potentially increases overall utilization, and could adversely impact your credit profile. Lenders also like to see a mix of different account types, showing you can responsibly manage multiple financial accounts without having accounts sent to collections. Keep in mind that while your score benefits from having a mix of credit cards and loans, it’s best to pay the balance each month on credit cards to avoid costly charges for interest and fees.

5. Failing to monitor your credit score

Knowing your score not only helps when applying for credit, but it also keeps you aware of potential fraud. If you see a sudden decrease in your score and you haven’t applied for credit, you might be the victim of identity theft, where someone is using your identity to open a line of credit without your knowledge. Your score isn’t affected when you check it, so you should monitor it regularly. Texell members can also review credit scores at no cost using the Credit Score & More tool in Digital Banking. 

You should also review your report annually to spot any errors that might damage your score. You can request a credit report once a year at no cost at AnnualCreditReport.com. 

6. Cosigning on credit accounts for others

If someone is starting to build their credit score and cannot get approved for a loan or credit card on their own, the lender may require a cosigner to lower the lender’s risk. Cosigning means you are legally responsible for paying the debt as if it were your own. If the person you are cosigning for fails to make payments on time or at the full amount, it can impact your credit score. This new debt also increases your debt-to-income ratio (DTI), a factor that lenders consider when you apply for another line of credit. Also, the lender can seize any property you use as collateral to pay off the debt if the cosigner fails to pay. If you’re considering becoming a cosigner for a family member or friend, keep these risks in mind before signing on the dotted line.

By avoiding these six credit score mistakes, you’ll increase your score and strengthen your finances, giving you a better chance of being approved for home loans, auto loans, and other financial products. Read 5 Credit Score Myths for more tips and to learn how your credit score is calculated.

¹ The Complete Guide to Your VantageScore 4.0 Credit Score from VantageScore.com. 
² 8 Common Credit Mistakes and How to Avoid Them by Ben Luthi from experian.com. 
³ Do Multiple Loan Inquiries Affect Your Credit Score? By Louis DeNicola from experian.com. 

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