Credit is a popular topic where I work. Here at Credit Karma, everyone knows their credit score and is making a conscious effort to improve it. We have the tools at our fingertips, like the Credit Report Card and Credit Simulator, and we know them in and out.
Considering all of this, it seems like I would be pretty on top of things credit-wise, right? Wrong.
My credit is great now, but when I first arrived at Credit Karma, it wasn’t. And I hadn’t a clue how to fix it. Now I know the mistakes I’ve made and how to reverse their credit score-dropping effects. Here’s hoping you can learn from a few rookie mistakes I’ve made.
Until recently, I had one line of credit: a credit card from my bank. This was a mistake for a couple of reasons:
- I had a poor mix of credit. My single line of credit didn’t show creditors my ability to manage multiple lines of different types of credit, such as student loans, a mortgage or an auto loan. Having a mix of credit is a good predictor of future credit behavior.
- It was easy to over-utilize my credit. Another very important factor of my credit score is my credit utilization rate, or how much of my available credit I’m using at any given time. Having just one credit card with a relatively low limit made it difficult for me to stay below the recommended credit utilization rate of 30 percent. I could easily use 50 percent or more of my available credit in a given month.
However, I had one great habit down – paying off my credit card in full each month and never having debt. With my good credit card habits, I knew I could manage a second card, so I got one to help me continue to build my good credit and keep my utilization rate low. As a bonus, it gives me cash back for my purchases, which is something I wasn’t getting with my old card.
I made some money mistakes when I was young, not realizing how they would affect my credit. When I was in college, I applied for a store credit card in order to score a pair of jeans for $25. I loved my new jeans, but I quickly forgot about the credit card bill until I had a delinquent payment on my credit report. When I finally got my act together, paid it off, and closed the account, I had spent more than $80 on that $25 pair of jeans. How? The interest payments on my revolving balance plus my late payment charges had racked up.
I’ve turned over a new leaf now. I have email and mobile alerts that tell me when I have 10 days left before my credit card bill is due. I haven’t missed a payment since that store card snafu.
Now that I’m keen on building my credit, I’m a bit obsessive about checking my credit score on Credit Karma (after all, it is free to check every day). I become worrisome when my score fluctuates too much. For instance, one month my credit score dropped more than 50 points. Seeing that initial plunge had me worried, until I took the time to check out the details of my Credit Report Card and saw that my credit utilization rate had jumped to nearly 50 percent, resulting in the credit score dip.
Instead of being obsessive about the number, I watch more closely the factors that influence my credit score so I can better understand how to improve it. For instance, now that I know my credit utilization has such a significant impact on my score, I’ve started to boost my emergency savings fund. Now I have a cash reserve when unexpected expenses come up, so I don’t have to rely solely on my credit card.
Bottom Line: I probably haven’t made the last of my credit mistakes. But at least now I have the tools to understand how my mistakes are influencing my credit. One day I hope to own a home. When that time comes, I’ll be proud to know that I understand my credit and how to build it to be its best before I apply for a loan.
Bethy Hardeman is the social media maven at CreditKarma.com, a completely free credit management service that provides free credit scores, financial education and personalized savings recommendations. Credit Karma helps more than 4.5 million consumers realize the everyday cost savings of having a good credit score.
Photo Via hadrienl