Credit scores don’t measure how “good” or “bad” you are with credit. If they did, the scale could be 1 for good and 0 for bad. Instead, credit scores are usually seen as an indicator of how well you manage your credit—they’re broad enough to incorporate a wide variety of credit behaviors. If you have a low credit score, but aren’t sure why, take it as a sign that you’re not handling your credit with the care it requires. Here are five common signs that you’re mishandling your credit and some tips to get you back on track.
You Miss Payments or Pay Late
Many factors go into your credit score, but payment history is one of the most important. Paying late or missing a payment entirely can knock points off a score, and doing so repeatedly can do serious damage. That’s why the best credit advice may be to simply to pay all your bills on time, every month.
If the due dates on your bills are catching you by surprise, a really easy way to ensure that bills get paid on time is to set up automatic payments out of your checking account. At the very least, you can set calendar reminders on your phone or computer.
You Pay Only the Minimum
Paying on time is important, but how much you pay matters, too. If you’re only making the minimum required payment on credit card balances, you’re probably not doing much to reduce your debt. That’s because the minimum might only barely cover the interest.
For example, say you have a $1,000 balance on a credit card debt with a 17 percent annual interest rate and a $25 minimum monthly payment. How many months would it take to pay it off? It’s not 40 months — $1,000 divided by $25 — as you might suspect at first glance. Because of the interest, it’s actually about 58 months.
The amount of money you owe factors into most credit scores. Reducing your credit balances can boost your score by shrinking both your total debt and the percentage of your available credit that you’re using, a factor known as credit utilization.
You Keep Moving Balances Around
Many credit card issuers offer zero interest on balance transfers for a limited time to attract new customers. This can be great if you have credit card debt you want to pay off. You can move the balance to the new card and pay it off more quickly because no interest is charged on the transferred amount. But some people transfer balances to avoid paying them off. They move their balances from one card to another, “parking” their debt with the new card for the duration of the zero-interest period, and then moving it on to yet another card. Shifting balances around to avoid dealing with the debt isn’t responsible credit management and it can actually add to your debt. Balance transfers may incur a fee, which could be around 3 percent of the transferred amount.
You Need More Credit — Again
Maxing out a credit line can be a sign that you need to get your spending under control, rather than a sign that you need another credit card. Credit scores reflect how well you’re managing debt, so if you want a good credit score, practice good credit habits. This means paying down debt, not carrying huge balances indefinitely.
Applying for new credit can ding your credit score as well. A new credit application results in a “hard inquiry” or “hard pull” on your credit report. This means someone has checked your credit as part of the process of extending credit. The inquiry suggests you may be adding new debt soon, so you could see your credit score dip. Multiple inquiries could magnify the effect.
You Never Check Your Credit Report
Smart consumers should have a sense of their credit score, but if that’s all you know, you’re only getting part of the picture. Credit scores are usually calculated from information in your credit reports. If you want to know why your score is good, bad or somewhere in between, you need to look at your credit reports as well.
Most people have at least three credit reports and they can get all 3 once a year for free. Your credit reports will show late payments, hard inquiries, delinquent accounts or other problems that could be dragging down your score. It can also show things that aren’t your fault and are harming your score. If creditors have misreported information about you, checking your credit report will allow you to spot the inaccuracies and get them fixed.