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Ten Common Mistakes to Avoid with Your Credit

Jun 25, 2008
Avoid these ten common credit mistakes, as they will negatively impact your scores. Unfortunately, many people make these mistakes without ever knowing their actions are going to harm their credit.

1) Not knowing your credit score.

You are the only one responsible for your credit score. With today's technology, if you do not know your own score it will be no one's fault but your own.

Spend the $40 or so and get a quality 3-bureau report, meaning you get a score from Experian, Equifax and Trans Union. Don't be cheap about this, because it only hurts one person - you.

2) Closing Accounts.

Do not close accounts that are paid off. In addition to the effect on your debt to available credit ratio, you also run the risk of shortening your credit history. Over time, these closed accounts will drop from your report, eliminating a good account and reducing the number of accounts you have successfully had. Remember the key to a good score is long term, successful management of your credit.

3) Believing that Good Income overcomes Bad Credit.

You must understand that a positive factor, like a high income, does not make up for a negative factor like bad credit. One does not cancel the other out.

4) Co-signing loans.

Perhaps one of the worst mistakes a person can make with regard to their own credit is co-signing for someone else. It is understandable that a person may want to help a family member, but you are taking a large risk by essentially guaranteeing that someone who does not qualify for a type of credit will repay that credit.

The loan will also most likely be reported on your credit report as well. When that person is late, you are late. Also, that debt can now be counted against you when you need to qualify for a loan, even if you are not paying it.

5) Not using the credit you have or using cash only.

It is a mistake to not have credit and to not use available credit. This does not mean you should max out what you have available, but it does mean use, and pay off monthly, your credit cards.

If you try to go through life paying cash for everything, you will not have enough of a credit history to qualify when you want to finance something, like a home.

6) Allowing a Collection Account.

Having a collection account, even a small one, on your credit report will lower your scores. Paying that account will NOT increase the scores. If you pay a collection account, the account will be noted as a "paid collection" but is still a negative on your report.

The best course of action, if you find yourself with a collection account, is to negotiate with the creditor to completely remove the item as part of the settlement. Do not believe them when they say they cannot do this. You will often need to speak to someone higher up the ladder than the person who answers your call.

Do whatever you have to do to accomplish this if at all possible. Many collection agencies will settle an account for 70%, or even 50% or less. However, you may want to negotiate to pay full face value in exchange for the complete removal of the account (be sure to have this in writing with a manager's name, direct phone number and signature before you send any money). This, in the long run, will be money well spent.

If you cannot get it removed from your report, understand that the account will be reported for seven more years from the time of payment. As each year passes, the negative impact on your credit score will lessen; but it is sound advice to avoid this situation in the first place.

7) Not increasing credit limits when you can.

Increasing your credit limits will quickly increase your credit scores, because you will now have a lower ratio of overall debt to overall credit limit. This assumes you do not run up the credit to its new limit. More credit is a good thing, not a bad thing, for responsible borrowers.

8) Ignoring mistakes on your report.

As discussed, you are solely responsible for your credit score. If there is a mistake, which happens often, you need to aggressively work to have it corrected. Do not assume a simple phone call or even a single certified letter will fix the problem.

There is no question that fighting with creditors about incorrect or misreported information is distasteful and stressful. But you must do this to protect your good name and prevent future problems.

It takes time to fight this battle, so do not wait until you need new credit to start.

9) Using personal credit for business.

When you are self-employed, it is common to use your personal credit accounts for the business. Instead, apply for business credit accounts and ask if they report to your personal credit report. Getting credit in a business name can be difficult, but you need to make the effort.

Often times, lenders will not be inclined to extend credit to a new company. If you must use personal credit, be careful. As soon as possible, re-apply for business credit once you have some history.

10) Not understanding your potential lender's credit guidelines.

Don't "assume" you have perfect credit. Verify it. And when it comes time to apply for credit, be sure to ask the potential lender what the new loan's credit guidelines are, so you understand how you will be evaluated.

Working with a qualified mortgage professional is a good first step. Be sure he or she not only understands their loan programs, but is also qualified to discuss credit and credit scoring. There are a lot of false experts out there giving bad advice (like those who tell you to close accounts, for instance). Being a well-educated borrower will be your best defense.
About the Author
Chris Esposito provides owner-builder construction financing nationwide through his Owner Builder 101 program. Visit www.OwnerBuilder101.com to get all the information you need to be a successful owner-builder, saving tens of thousands on your next home. Or call Owner Builder 101 at (877) 876-3688.
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