Although unemployment rates are at their lowest levels in years, many people are still struggling. In 2017, there were more than 750,000 instances of personal bankruptcy.
Declaring bankruptcy is one way to hurt your credit score, but it isn’t the only way. Missing payments, taking out new loans, maxing out your cards and a whole host of other activities will damage your score. If you have poor credit to begin with and are working on repairing it, you don’t want to be sabotaging yourself by doing new things that hurt your score.
Click through to learn what not to do when you’re working on raising your credit score.
1. Repeating the Same Mistakes
If your credit is severely damaged, you should still work to repair it. In order to do so, though, you need to make sure you don’t hurt your credit even further. Avoid sabotaging your credit repair efforts by steering clear of the pitfalls that got you a low credit score in the first place. Start by figuring out what your credit score actually is.
2. Failing to Budget
Where does credit repair begin? With a budget, of course. You wouldn’t travel without a map, and you shouldn’t spend money without a game plan. Creating a budget allows you to identify:
- Spending and saving habits
- Areas that need improvement
- Progress over time
3. Failing to Track Monthly Expenses
A key component of budgeting is tracking your monthly expenses. Only then will you know exactly where your money is going. Once you’ve done that, you can start paying down debt and repairing your credit.
4. Ignoring Your Credit Reports
Knowledge is power. When you apply for a credit card or loan, the bank checks your credit score. Know everything the bankers do by reviewing a free copy of your credit report. Your sub-optimal credit score isn’t embarrassing, it’s just an opportunity for improvement. There’s no point keeping your head in the sand.
5. Not Looking For Errors
If you’re working on repairing your credit, you need to know exactly what is dragging it down. Get a copy of your credit report and examine it closely. It’s possible there is an error on it. Once you’ve spotted it you can dispute the credit report error and hopefully see your score rise a little.
6. Maxing Out Your Credit Cards
Good credit means maximizing its use, right? Wrong. Pushing your credit cards to the limit can affect your credit utilization ratio, which is the amount you owe in relation to your credit limit. Learn how your credit utilization rate affects your credit score. A high ratio implies risk, a factor that hurts your credit score.
7. Keeping Your Credit Utilization Ratio High
For a careful approach, aim for a credit utilization ratio of 25 percent or less. For example, if your credit card has a $10,000 limit, maintain a balance of $2,500 or less. Then you’ll be on your way to rebuilding your credit.
8. Closing Old Accounts
In the world of credit scoring, age is a virtue. While you might think of closing an old and unused account is wise, its impact could negatively affect your score by increasing your credit utilization ratio.
For example, suppose you have two credit cards, each with a $10,000 limit. Card A carries a zero balance, and Card B has a balance of $3,200. You decide to close Card A since you never use it, effectively losing $10,000 in available credit and raising your overall utilization ratio from 16 percent to 32 percent. Breathe life into your score by keeping your accounts current and active.
9. Applying for Too Many Accounts
Although new credit plays a vital role in an active score, applying for too many accounts can send the wrong message. Each credit application places a hard inquiry in your file. Too many hard inquiries can ding your score and imply risky behavior. Protect your score and reputation by practicing discretion.
10. Co-Signing Loans
Suppose your friend needs help securing a loan. They know you have been working on improving your credit score, so they ask you to co-sign the application. Vouching for a friend’s loan means:
- Placing your friend’s account on your credit reports
- In some cases, increasing your credit utilization ratio
- Assuming responsibility for the debt if your friend fails to pay
- Suffering credit damage if your friend spends irresponsibly
That’s a pretty risky proposition, considering your friend is having trouble getting a loan in the first place. Steer him toward loans for people with bad credit instead.
11. Taking a Passive Approach
Here’s the bottom line: credit repair can be challenging, and your recovery time depends on the severity of past mistakes. But don’t allow current struggles to affect your long-term future. Take a proactive stance to ensure financial strength.
Click through to learn how to set yourself up for a perfect credit score.
More on Credit Scores
- What Is a Good Credit Score?
- This Easy Trick Will Improve Your Credit Score and Avoid Late Payments
- 3 Things to Do Now If You Have a 600 Credit Score
Kailiokalani Davison contributed to the reporting for this article.
About the Author
Sarah Elliott is a credit expert with CreditRepair.com, specializing in personal money management and credit repair. Originally trained as a tech writer, she began her career writing online courses and administrative manuals for Fortune 500 insurance, HR and engineering firms. After forming her writing consultancy, Top Drawer Publications, in 2009, Sarah began to write about personal finance.