Whenever there is a problem with credit score, people take it very seriously. But, unfortunately, they often act rashly, taking action that seems to on the face seems to be working to improve the credit, but in reality, is damaging the same. Therefore, it is important for you to be aware of those common mistakes and know how to avoid the same. But before that, let me give you a brief insight into some of the important components that actually make up your FICO score.
Key Components Of Credit Score
How punctual you are in making the debt payments? - 35%
Debt Ratio (Total amount of debt vs. credit limit) - 30%
The total length of your credit history - 15%
Whether you have obtained any amount of credit recently - 10%
Types of credit you have used - 10%
Mistake I: Cancellation Of Your Old Credit Cards
This is one of the worst things that people do to “improve” their credit score - they start getting their old credit cards cancelled, thinking doing this will repair the damage. But, it always worsens the situation. As you can see above, the length of your credit history contributes to 15% of your FICO score. Canceling the old credit cards will not only reduce the length of your credit history, but will also worsen your debt ratio - this is another component that contributes to 30% of your FICO score (see above). Therefore, the best strategy is to stop using that card instead of getting the same cancelled.
Mistake II: Reaching The Maximum Limit Of All Your Credit Cards
It is very important for you to understand that even if you are making a timely payment maxing out all your credit cards will not improve your credit score. It will rather damage the same. Always remember, the lower the debt ratio (credit card debt vs. credit card limit), the better your FICO score will be, and vice versa. Such activities will only worsen this ratio. Therefore, the idea is to work in such a way that the value of this ratio gets reduced. You can do this by focusing more on making the repayment rather than increasing the debt by making more purchases. In fact, you should make extra payments if you can.
Mistake III: Too Late On Any One Card And Keeping Up With The Payment Of Other Cards
It has been found that when people face credit score blues, they try to stay current on most of the credit cards they own, but they forget about one or two cards and let their payments go late. This is again very risky. As you can see above, the punctuality of payment contributes to 35% of your FICO score. Therefore, make sure that you are not getting late on even one of your cards.
In the next part, I will explain some other mistakes that you need to avoid. Meanwhile you can visit my website for more information on how to deal with credit score blues. This complete online resource guide on debt management will also tell you how to make the best use of a debt consolidation program.