Introduction
Your credit score is more important than you may think. It has consequences for whether you can buy a car, rent an apartment or get approved for a loan. But what happens if your score continues to fall and you don’t know why?
It’s easy to get it wrong when you don’t even know what’s right. These credit pitfalls in disguise erode your score month after month. The worst part? Most of these things are fairly easy to address, once you know what it is that you’re looking for.
In this guide, you will learn about 10 credit traps that can be sabotaging your financial future. We’ll tell you what those traps are, exactly how they’re bad for you and how to sidestep getting caught in them.
Let me help you save your credit score.
What Causes Your Credit Score to Drop?
Before we get too deep into hidden traps, let’s have a little overview of credit scores.
Your credit score is a three-digit number between 300 and 850. Higher numbers mean better credit. Your score is based on five main factors:
- Payment history (35%)
- Amount you owe (30%)
- Length of credit history (15%)
- New credit accounts (10%)
- Types of credit used (10%)
Missteps in any of these areas, however small, can have a distorted impact on your score. And now onto the traps that nearly everyone overlooks.
Trap #1: Shutting Down Old Credit Cards
Many people believe that closing out credit cards they no longer use will give their score a boost. This seems logical, right? Wrong.
These old cards are actually only hurting you in two ways. For one, it shrinks your available credit. If you owe $2,000 and have total credit available to spend of $10,000, that puts you at 20%. Shut down a card with a $5,000 cap and all of a sudden you’re using 40% of your available credit.
Second, closing old accounts shortens the length of your credit history. The age of your credit history accounts for 15% of your score.
What to do instead: Keep old cards open, even if you barely use them. Put a small recurring charge on each card (such as a streaming service) and pay automatically. This keeps those accounts active without any work for you.
Trap #2: Paying Only the Minimums
Credit card companies are happy with you when you pay just the minimum. You might believe you’re a good citizen by paying on time, but minimum payments keep you indebted for years.
Here’s why it hurts your credit: You use a high percentage of the credit you have available each month. This heavy “credit utilization” hurts your score.
Let’s look at an example:
| Monthly Payment | Time to Pay Off $5,000 | Total Interest Paid |
|---|---|---|
| Minimum ($150) | 17 years | $4,200 |
| $300 | 2 years | $720 |
| $500 | 1 year | $400 |
Assumes 18% APR
What to do instead: Pay more than the minimum whenever you can. Even if it was just $50 a month, that would really help. Work on paying down your balances to 30% of your limit or less.
Trap #3: Overlooking Small Collections Accounts
The $47 medical bill that you’ve forgotten about? It might be tanking your credit score.
A lot of individuals overlook small collection accounts as a result of the relatively low amounts they carry. But a $50 collection has just as negative an impact on your score as a $5,000 collection.
You must continue to pay on collections accounts. They remain on your credit report for seven years. During that period, they make it more difficult to get approved for credit and can cost you thousands of dollars in higher interest rates.
What to do instead: Use AnnualCreditReport.com. Should you encounter a collection account, contact the collection agency at once. Every once in a while you can work out what’s commonly called a “pay for delete” agreement — they erase the entry after you pay.
Trap #4: Obtaining Too Many Lines of Credit Too Quickly
It makes sense to shop for the best credit card or loan rate. Yet applying for several accounts in quick succession can raise red flags with lenders.
Every application generates a “hard inquiry” on your credit report. A question or two shouldn’t do too much damage. But five or six in a few months starts to make it look like you’re on the desperate hunt for credit.
Hard inquiries remain on your report for two years and can lower your score 5-10 points each.
What to do instead: Compare credit cards and loans before you apply. Lots of sites allow you to see if you’re pre-qualified without impacting your score. Space applications at least six months apart if possible.
Trap #5: Co-Signing Without Protection
Your friend needs help getting a car loan approved. They will, they promise, make every payment. You co-sign to help them out.
Then they miss a payment. Or two. Or they stop paying altogether.
Guess what? Those missed payments also show up on YOUR credit report. By co-signing, you become just as responsible for the debt.
What to do instead: Proceed with enormous caution before you co-sign anything. If you do co-sign, try to get the lender to inform you if a payment is late. Think of it as a loan you may find yourself repaying one way or another, when this episode finally ends.
Trap #6: Paying by a Few Days Late
Life gets busy. You skip a bill one week. No big deal, right?
Wrong again. A payment that is 30 days late gets reported to credit bureaus and can lower your score by 90-110 points. And this one mistake will take years to recover from.
What’s more, that late payment will remain on your credit report for seven years.
What to do instead: Arrange for automatic payment in an amount at least equal to the minimum due on all of your bills. Set up phone calendar reminders. Most credit cards allow you to pick your due date, so select a date that reflects your paycheck schedule.
Trap #7: Using All of Your Credit Cards
It sounds like it’s fine to use your full credit limit if you’re paying the balance off every month. After all, it’s not like you’re carrying a balance or paying interest.
But that’s not how credit bureaus see it. They report your balance at a certain point in the month — typically when your statement cycles. If you load up your card before that date, it appears you are maxed out.
High credit utilization (using a big percentage of your available credit) can drop your score even if you pay in full.
Optimal Credit Utilization Breakdown
| Credit Utilization | Score Impact |
|---|---|
| Less than 10% | Excellent |
| 10-30% | Good |
| 30-50% | Fair |
| 50-70% | Poor |
| More than 70% | Very poor |
What to do instead: Don’t carry a balance that’s more than 30 percent of your limit, and ideally keep it below 10 percent. If you use your card heavily, make multiple payments throughout the month to keep the reported balance low.
Trap #8: Failing to Check Your Credit Reports for Errors
Did you know that 1 in every 5 people has inaccurate information on their credit report? Unrepaired, these errors can wreak havoc on your score.
Errors include:
- Accounts that aren’t yours
- Wrong payment history
- Old information that should have been dropped
- Duplicate accounts
- Incorrect credit limits
It could be due to the mistakes of others, or by someone stealing your identity.
What to do instead: Order your three credit reports (Equifax, Experian and TransUnion) at least once a year. You can access free reports at AnnualCreditReport.com. Write to dispute any mistake at once. For more guidance on managing your financial health, visit Corey P Smith’s financial insights.
Trap #9: Not Negotiating While Settling Debts
You’re in debt and want to pay less than what you owe. The creditor offers to take 50% of the amount owed.
Problem solved, right? Not quite.
Accounts that have been settled receive the designation “settled for less than owed” on your credit report. This black mark remains for seven years and warns prospective lenders that you didn’t fulfill your entire obligation.
What to do instead: Before you pay off any debt, talk with the creditor about marking the account as “paid in full” — not “settled.” Do not send money without something in writing. Some creditors will accept this, particularly if you can pay the agreed-on amount all at once.
Trap #10: Allowing An Authorized User to Drag Down Your Account
Authorizing someone to use your credit card can allow them to build credit. It can also ruin your credit if they’re not responsible.
Authorized users on the account can buy. Your credit takes the hit if they overspend or you can’t make the payments. Even if they promise to make good on their charges, you’re still on the hook for them in the eyes of the law.
On the other hand, if you’re an authorized user on someone else’s account and they miss payments, it can damage YOUR score as well.
What to do instead: Add as authorized users only those you absolutely trust. If your card issuer offers the option, enforce spending limits. Monitor the account weekly. If you are an authorized user on a troubled account, request to be taken off immediately.
How to Keep Track of Your Credit Health
Your credit needs regular maintenance. Here’s a simple monthly checklist:
- Scan your credit card statements for any charges you don’t recognize
- Check the credit utilization on all of your cards
- Verify all bills are enrolled in autopay
- Review one of your three credit reports (rotate among them)
- Check your credit score via your bank or credit card app
Nowadays, most banks and credit cards provide free credit score monitoring. Employ these tools to catch the issues when they are small.
Quick Recovery Strategies
Already caught in a few of these traps? Don’t panic. Here’s how to start recovering:
Immediate actions (this week):
- Establish automatic payments for all accounts
- Review your credit reports for errors
- Calculate utilization on both cards
Short-term actions (this month):
- Prepare a plan to repay the debt on high utilization cards
- Touch base with lenders about collection accounts
- Remove yourself from controversial authorized user accounts
Long-term actions (next 6-12 months):
- Establish an emergency fund to prevent falling behind on payment
- Keep reported balances below 30% of the credit limit
- Challenge and correct errors on your credit reports
- Do not apply for more credit unless you have to
The Final Word on Protecting Your Credit
After all, your credit score has a major effect on your financial life for years and years. It’s these secretly lurking traps that can lower your score without you even knowing it, until the damage is already done.
The good news? The vast majority of those traps are easily avoidable if you know what to look for. Small tweaks in how you manage credit can lead to large changes in your score.
Remember these key points:
- Keep old credit cards open
- Pay more than the minimum
- Check your credit reports regularly
- Never ignore collection accounts
- Be very careful with co-signing
- Set up automatic payments
- Keep credit utilization low
Your credit score really doesn’t have to be a mystery. So take the reins now by steering clear of these pitfalls and establishing healthy credit habits. Your future self will thank you when you’re approved for that mortgage or car loan with a low interest rate.
Begin with one or two changes this week. Check your credit report. Set up automatic payments. Pay down a high-balance card. Every little bit helps to build a foundation of better credit and a stronger financial future.
For additional information on credit scores and how they’re calculated, visit the Consumer Financial Protection Bureau’s credit reports guide.
Frequently Asked Questions
How long does it take to bounce back from these credit traps?
Recovery time varies by situation. Late payments are less detrimental to your score the further in your past they fall but remain on your report for seven years. You can see improvement in three to six months by paying down balances and making on-time payments. Big negatives like collections take longer to recover from.
Will accessing my own credit report harm it?
No. Checking your credit is a “soft inquiry” and will not change your score at all. The only exception is so-called “hard inquiries” that occur when you apply for credit; they can shave a few points off your score.
What’s the quickest way to boost my credit score?
Get credit card balances under 30% utilization. This can help improve your score in 30-60 days. Make sure bills are paid every month going forward too. These are the two most powerful steps you can take right now.
Should I pay or settle collections accounts first?
Always negotiate first. Call the collection agency and see if they’ll delete in exchange for payment (pay for delete). For any arrangement, get a receipt in writing before sending money. When you just pay without negotiating, that negative mark remains part of your report.
How many credit cards should I have?
There is no magic number, but 3-5 credit cards with low balances demonstrate that you can handle credit responsibly. Even more crucial than the number is to keep utilization low and make on-time payments.
Is there a way to erase accurate negative information from my credit report?
As a rule no, because true negative information must remain for the length of time it is required to (typically 7 years). But you can challenge incorrect data and add statements of explanation to your report. Some creditors will remove negative marks as part of a payment deal.
Will credit card accounts be removed from my report if I close them?
No. Closed accounts can remain on your credit report for as long as 10 years if they were in good standing, or seven years in the case of an account with negative marks. They are still reflected in your score during that time.
