A good credit score is the key to one’s economic well-being. Simply stated, a good credit score saves money. In fact, the potential savings with better interest rates and other fees can quickly add up to thousands of dollars; however, even the slightest drop in your credit score can translate into interest rate hikes that cost thousands of dollars over time and increase your monthly expenses significantly.

1. Avoid carrying high monthly balances. Getting approved for a $10,000 line of credit or more does not mean you have a license to spend $10,000. Your debt-to-credit ratio approximately accounts for one-third of your FICO credit score. The best range to grow your debt-to-credit ratio is around 10%. An easy way to think of this ratio is that for every thousand dollars in available credit you have, you can carry one hundred dollars on your balance. Ten percent is the ideal number, but a ratio as high as 29% is considered acceptable by most creditors today. Once your ratio exceeds 30%, your credit score will take a hit, as creditors consider you to be a higher-risk borrower.
2. Keep old or inactive accounts open. This recommendation may seem counter intuitive, but it is directly related to your debt-to-credit ratio. Closing old accounts lowers your available credit and raises your debt-to-credit ratio. If the increase puts your ratio to over 30%, your credit score will take a hit. In addition to the debt-to-credit ratio, the average age of credit accounts can also impact the FICO scores. Keeping old accounts in good standing open can help bolster your average age of accounts and credit history.
3. Pay your credit card bills on time. Making late payments may seem a simple mistake. After all, who has not overlooked a bill or accidentally sent a payment a few days behind? Most credit card companies do not report late payments to credit bureaus until the account is more than thirty days late. Still, some companies may report late payments after only a few days. Payment history accounts for as much as 35% of your credit score. A few missed payments can reduce your FICO score by as much as 100 points and cost you thousands of dollars in higher interest payments. Even if only the minimum payments are made, the difference in your credit score can be substantial.
4. Avoid credit cards that do not report to credit rating agencies. Credit card companies are not required to report to the credit bureaus, and some elect not to. This feature may appear to be a benefit, since late payments will not be reported and damage your credit score; however, these credit cards will do nothing to help you build a good credit history. If the account ever goes to collection, your credit report would contain a collection notice without any other positive credit history to offset the damage.
5. Diversify your lines of credit. Having several credit lines open does not necessarily hurt your credit score, but you need to manage the types of accounts you hold. Ten percent of the FICO score is based on how diversified your lines of credit are. To the credit rating agencies, a healthy mix of credit consists of a variety of credit cards combined with secured or installment loans like mortgages, car loans, or student loans.

Building and maintaining an awesome credit history takes time and discipline. Keep your debt-to-credit ratio under 30%. Be strategic about which inactive accounts you close, since terminating accounts in good standing also cuts off the credit history you have developed through those cards. Do not maintain too many accounts with balances on them. Most importantly, pay your credit card bills on time. The best way to look at your credit score is in dollars and cents. A few simple mistakes can lower your score considerably and cost you a lot more on your next loan.

For more information about how these popular credit mistakes can impact your home mortgage loans, please contact Scott Hill of American Pacific Mortgage by email at scott@scotthillteam.com or by phone at (408)626-0394.