Simple Ways We Ruin Our Credit Without Knowing It

Everyone knows that your credit score is important for most of your financial moves, whether it be applying for a credit card or trying to score that massive mortgage. The problem is that most of us don't know how our credit scores are calculated, so we don't really know how to keep them healthy and high. In fact, many of us are making some very common mistakes when it comes to our credit, without even know that these damage our credit scores. Here are four of the most common mistakes people make and how you can fix them:

Not paying off credit cards every month

This is the biggest mistake. Someone along the way started a rumor that it is good to have a little debt when it comes to credit cards. While having loan debt can be beneficial to your credit, having credit card debt is never good. One of the key factors that determines your credit score is your credit utilization ratio, which is a fancy way of saying the measure of how much credit you are using. If you are carrying a balance, your credit utilization ratio goes up, which means your credit score is likely to go down. Bottom line, keep your credit cards clean by paying off your balance every month.

Canceling our credit cards

Cutting down on the amount of credit you have cuts down on temptation, right? It does, but it can also hurt your credit. It goes back to your credit utilization ration. Say you have a combined $10,000 credit limit over two cards, and your balance is $1,000, which means you are using 10 percent of your credit. If you cancel one of those cards and your limit is now $5,000, you are suddenly using 20% of your credit, which will bring down your credit score.

Not diversifying our credit portfolio

Another key factor in determining your credit score is how diverse your credit portfolio is. At the very least, you should have a credit card and some sort of installment credit like a loan or mortgage. Having both revolving credit (credit cards) and installment credit helps diversify your portfolio and gives those who are determining your score more information to help them decide whether you are a good candidate for credit or not. If you are looking for a credit card to help you round out your credit portfolio, make sure to look at a rewards credit card, so you can get a little something back with each purchase.

Not checking for errors in our credit report

A recent FTC study showed that almost 42 million people have errors on their credit report, which is a ridiculous number of people. Five percent of those people saw a 25-point jump in their credit score once the errors were fixed. What does this mean? If you have no idea what's in your credit report, it is time to find out. You can either apply for a free look at your reports from the government, or you can sign up for a credit monitoring service to check them out. The good thing about most credit report monitoring services is that they will assist you in correcting any errors in your credit report.

If you think your credit score could be better, check out this article on how to build your credit score back up.