How to Avoid Common Credit Mistakes

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Improving your credit can help you remove financial obstacles and unlock new opportunities. While DIY credit management requires some hands-on work and patience, a few simple strategies can help you build stronger credit.  

It’s extremely important to avoid common credit mistakes as you work on DIY credit management. Here’s what you need to know.  

What is DIY Credit Management?  

DIY credit management is the process of improving your credit by yourself. The steps you need to take to improve your credit depend on the state of your finances, credit report, and credit scores. Taking a DIY approach to building your credit score has many benefits:

• Learning how credit works and what behaviors affect your credit score.  
• Identifying strengths and weaknesses in your own credit and financial behaviors.  
• Avoiding costly services from a credit management company.

4 Common Credit Mistakes

Here are some common mistakes to avoid on your DIY credit management journey, along with effective strategies you can use to build good credit:  

Not Regularly Reviewing Your Credit Report

DIY credit management will be impossible if you don’t check your credit report. If you don’t know what’s in your credit report, you won’t know how to build your credit. And if you don’t continue to review your credit report on a regular basis, you’ll have no idea if your credit building project is making progress.  

You can use a credit monitoring service to receive copies of your credit report and credit scores, as well as notifications or alerts to changes in your reports or scores. That way, you can easily stay on top of the state of your credit as you work to build it.  

Not Addressing Negative Information on Your Credit Report

People often make the mistake of ignoring negative or inaccurate information on their credit report because they think they can’t do anything about it. But if there is negative information on your credit report that you believe is inaccurate, you may be able to dispute it and get it removed.  

When you read your credit report, review the following types of information for accuracy:

• Basic Information: Personally identifiable information (PII) including your name and past addresses.  ‍
• Accounts: The credit accounts you hold or have held for the last seven years.  ‍
• Public Records: Bankruptcies can show up on your credit report for up to 10 years.  ‍
• Credit Inquiries: Hard inquiries (which can affect your credit) show up when a creditor pulls your credit report as part of a credit application. Soft inquiries (which should not affect your credit) show up when someone pulls your credit report for another reason (such as when you check your own credit or when companies extend credit preapproval offers).  

You should dispute any inaccurate information you find on your credit report to maintain a credit report that fairly represents you. You can submit disputes directly to the credit bureau that is reporting inaccurate information.  

Even if the negative information you find is accurate, you may be able to take action to help positively impact your credit score. For example, you can contact a creditor to resolve a late payment showing up on your credit report to prevent the account from going to collections.  

Learn more about how we help make credit report disputes easier than ever.

Misunderstanding the Impact of Credit Utilization Ratio  

Credit utilization is a major factor in determining your credit score, but many consumers don’t understand how it works. If you don’t follow the right financial strategies, your credit utilization ratio could be working against you instead of helping you.  

In a nutshell, your credit utilization ratio is the percentage of your available credit that you are currently using. For example, if you have two credit cards with a total credit limit of $10,000 and you are carrying a $5,000 balance between the two of them, your credit utilization ratio is 50%.  

Maintaining a low credit utilization ratio can help your credit score. Experts often recommend keeping your balance across all revolving credit accounts below 30%. Here are some ways to use your credit utilization ratio to your advantage:

• Open a new credit card to automatically increase your available credit and reduce your utilization.  
• Maintain a balance below 30% across all your revolving credit accounts. If your balance is too high, try to pay it down over time.  
• Ask your credit card company for a credit limit increase, which automatically decreases your credit utilization (as long as you don’t immediately start racking up additional debt).  

Closing Old Credit Card Accounts  

The age of your credit accounts directly impacts your credit. The older your accounts, the better it is for your credit score. Closing old credit cards that you don’t use anymore can harm your credit score because the average age of your accounts might shrink.  

Closing a credit card also reduces your available credit limit, which is bad for your credit utilization ratio. Between the age of your accounts and your credit utilization, closing old credit cards can deal a serious blow to your credit score.  

Of course, it doesn’t make sense to keep a credit card open if doing so will get you into financial hot water. If you can’t responsibly manage your credit card in a way that benefits your credit, you’re probably better off closing it.  

The Importance of Payment History in DIY Credit Management

Payment history is the single most important factor that makes up your credit score. Here’s how to use payment history to help build better credit:  

Pay Bills on Time  

Make all your bill payments on time. A single missed payment can seriously damage your credit score. Over time, paying your bills by the due date builds strong credit history.  

Set Up Automatic Payments and Reminders

Many creditors and service providers can automatically charge your credit card or bank account on a predetermined date each month. Automatic payments are convenient and easy to set and forget, and you may even receive a small discount. If you’d rather maintain control of when you pay, set up monthly reminders on your phone or email calendar to avoid missing a payment.  

Communicate with Creditors in Case of Financial Difficulties

If you can’t pay a bill on time, call the creditor or service provider and explain the situation. You might be able to avoid damaging your credit score. Make sure to provide the following information:

• When will you be able to pay the bill in full?
• Can you pay anything toward the bill now?  
• Do you have a previous history of timely payments?  

The creditor may allow you to pay a reduced amount, put you on a monthly repayment plan, or let you temporarily stop making payments without becoming delinquent.  

The Negative Impact of High Credit Card Balances

High credit card balances can harm your credit score. Here are some tips to keep your balance low.

Pay Off Your Credit Card Balance in Full Every Month

The best way to use a credit card is to only charge what you can afford to pay off in full each month. You can use this strategy to build credit, avoid interest fees, and maintain a low credit card balance.  

Pay Down Existing Credit Card Balances

The debt snowball and the debt avalanche are two of the most popular strategies to pay down debt. You can use one of these methods to reduce your credit card balances.  

• The debt snowball method involves paying your smallest debts first. So, if you have three credit cards, you’ll focus on paying them down in order of the largest balance to the smallest balance.  
• The debt avalanche method involves paying your debts with the highest interest rates first. So, if you have three credit cards with varying interest rates, you’ll focus on paying them down in order of the highest interest rate to the lowest interest rate.  

Use Balance Transfer Credit Cards

Credit cards with balance transfer offers can help you pay off credit card debt faster. You simply transfer your existing credit card balances to a new credit card with a low introductory interest rate. Look for balance transfer cards with the following features:

• Introductory 0% APR: If you can qualify, get a card that offers 0% interest for a limited time (if you can’t, look for the lowest possible rate you can get).  ‍
• Low Balance Transfer Fees: Some cards charge 3% to 5% of the balance transfer amount when you initiate a transfer. Look for cards with low, or nonexistent, fees.  ‍
• Long Promotional Periods: You want to pay off the balance transfer within the introductory rate period. Look for cards that give you enough time to pay off your balance.  

When you get your card, make sure to initiate the balance transfer as soon as possible. Budget to pay the balance off in full by the time the introductory rate expires. Avoid using the card for everyday spending.  

Check out our top balance transfer credit card offers.

DIY Credit Management and the Seven-Year Rule

The DIY credit management process requires patience. Most types of information stay on your credit report for seven years (bankruptcies can stay on your credit report for up to 10 years). Once negative items expire and are removed from your report, they will no longer affect your credit. As long as you continue to make your payments on time, maintain low balances and otherwise practice good credit habits, your credit will continue to improve over time.  

FAQs

What Happens If I Make Late Payments or Miss Payments?  

Once your payment is 30 days past due, the company can report the missed payment to the credit bureaus. The later it gets, the more it can negatively affect your credit score. Eventually, the account may be sent to collections. Late payments can affect your credit score for up to seven years, though the impact will lessen over time.  

Can Closing Old Credit Accounts Hurt My Credit?  

Closing old credit accounts can hurt your credit by reducing the average age of your accounts and, in the case of revolving credit accounts, raising your credit utilization ratio.  

How Does Applying for Multiple Credit Accounts Affect My Credit?  

Applying for too many credit accounts in a short time frame may lower your credit score because it shows that you may be desperate for credit. Shopping around for the best rate for a single type of account – for example, applying for a mortgage with a few different lenders before choosing one – generally shouldn’t affect your credit as long as the process takes place over a brief period of time.  

Bottom Line

DIY credit management is possible, but it takes time and effort. If you check your credit report and dispute inaccurate information, pay your bills on time, and avoid taking on too much debt, you should be able to build a strong credit history.

Luckily, there are tools that can help you on your credit journey. With CreditBuilderIQ, you get regular access to your credit report and credit scores for valuable insight. Plus, you get access to an automated dispute letter generator to make disputing inaccuracies on your credit report a breeze.  

Get started on your path to better credit with CreditBuilderIQ today.