5 Mistakes that RUIN your Credit Score

Once of you guys, it's Graham here. So I've said it before and I've said it again, but building your credit is probably one of the most important things that you can do to improve your financial future. Not only can having a good credit score get the lowest interest rate anytime you buy a house, finance a car, rent an apartment, or build a business, but it's also extremely easy to do once you just understand the basics of how it works.

However, the bad news is that because the concept of building your credit tends to be so simple, it also means that it's often very simple to ruin as well without even realizing it. So in this video, we're gonna be going over the five things you absolutely must avoid at all costs that will totally destroy and ruin your credit score. The best part about all of these is that they're extremely easy to prevent.

As long as you just smash that like button if you haven't done that already, it greatly helps the channel and rumor has it that it might actually help increase your credit score. It's not verified, but there's only one way to find out, so make sure to hit the like button and let's get into the video.

The first and probably worst thing that you can do that will totally destroy your credit score is by missing a payment or paying it off late. Now, this is probably one of the most detrimental mistakes that you could make because your payment history makes up about 35% of your overall credit score.

This means that if you have a 780 credit score, but then you miss a payment by more than 30 days, that could potentially drop your score all the way down to 690 or below. Missing a payment could quite literally be the difference between qualifying for the home you've always wanted to buy or getting denied for your loan—all for one single late or missed payment.

What's even worse is that your payment history stays on your report for seven years. So if you have one single late payment, that's going to be with you for quite some time—like that pesky friend who always overstays their welcome by seven years.

When it comes to preventing these from happening, here are two things I always do. The first is always having Auto Pay enabled, to at the very least, make the minimum payment. This way, no matter what happens, I will always pay off the minimum amount I owe so that it shows I've always paid on time.

This is because when credit cards report late payments, they consider a late payment as no payment at all. But as long as you just make the minimum payment, which can be as low as $25, then technically, you've still paid your bill on time as agreed, even though you've carried a balance.

Now, secondly, I use a combination of mint.com and creditkarma.com to keep track of my credit card balances. Every few weeks, if I see any credit card with a balance, usually what I'll do is go and pay it off in full just so I don't forget about doing it later. Doing all of this maybe takes me a few minutes every other week just to manage and make sure it's all taken care of, so it's very easy to do.

However, with all of that said, there is some good news when it comes to this kind of sort of that is if you miss a payment by really just a few days, usually nothing will happen. Even though you'll still be hit with a credit card late fee, usually they will not report a late payment to the credit bureaus until you are more than 30 days late.

This means that in most situations, if you end up paying your credit card off like 29 days late, usually you'll be okay as far as your credit score is concerned. Now, of course, don’t ever push it that late, obviously, but just in the event something happens and you paid off a few days late, usually it's not the end of the world.

So anyway, moral of the story, but always make sure you pay off your credit card on time, in full, and always have Auto Pay enabled just in the rare occurrence that something happens and you accidentally forget.

Number two: the second ruiner of credit scores, and this is something that many many people are guilty of at some point or another, and that is by maxing out their credit cards. That is because 30% of your credit score is broken down by what's called credit utilization, which is basically how much credit you have available to you versus how much of that you actually use.

This means if you have a three thousand dollar credit line and you go and spend all three thousand dollars on that, then guess what? Congratulations! You're now seen as a higher risk borrower to lenders because you've used all the credit you have available to you, and then statistically from that, you're less likely to repay it.

So when it comes to avoiding this mistake, thankfully it's very easy to do in a few very simple steps. The first one is to always keep your credit utilization under 30%, which means for every $1,000 of credit you have available to you, you're not gonna spend more than $300. That seems to be the sweet spot for credit bureaus, and under a 30% utilization gives you enough wiggle room to be seen as a low-risk borrower and therefore have a slightly higher credit score.

The second thing you can do if you need to make larger one-time purchases is to pay off your credit card as soon as you exceed 30%. For example, I had to get a new roof, and that was going to be $14,000. So I put it on a credit card to get the points, even though that credit card had a credit line of twenty thousand dollars.

Pretty much once that $14,000 charge posted on my credit card, I just went and paid it off in full, so that way it would never be reported to the credit bureaus and it would show that I had no remaining balance. You could do the exact same thing as well. Even if you don't pay off your credit card in full, what you can do is still make a very large payment to get your credit utilization below 30%, so that way you still get the best credit score.

The third strategy that I've utilized is to have multiple lines of credit open, so that way it lowers your overall credit utilization. For example, if I have a three thousand dollar credit available to me overall and I go and spend three thousand dollars like the next day, well, there we go! That just hurt my score.

However, if I have 10 credit cards with a $100,000 overall limit and I go and make that same three thousand dollar purchase, well, that's fine because it shows on my credit report that I'm only using three percent of my overall credit limit. But now, with all that said, the good news when it comes to this is that this only temporarily lowers your score until you pay it down.

So yes, it could affect your score in the short term, but in the long term, you really have nothing to worry about as long as you just pay it off in full.

Alright, so number three: the third ruiner of credit scores, and this is something that we're all probably gonna have to deal with at some point or another if we haven't dealt with this already, and that is by opening too many lines of credit too quickly. This is when you go and apply for multiple credit cards at the same time, or you apply for a credit card and then apply for a mortgage, and then apply for an auto loan because you want to flex on YouTube.

Each time you apply for a new line of credit, it's called a hard inquiry, which means a third-party company runs your credit indicating that you've applied for a new loan. Each time this happens, it lowers your score between three and five points and also affects your credit report for the next six months.

Now this one is a bit of a double-edged sword because the more credit you have available to you, the more diverse your credit report is, and because of that, the higher your score will be long-term. In the short term, however, the more cards you apply for at the same time will show that you're a riskier borrower to lenders, and because of that, you'll tend to have a lower credit score.

That's why it's very common for people to think that they don't want to open up new credit cards because it's going to lower their score, and that is very true but in the short-term. But this is almost like an evil necessity because in order to get a larger credit limit and have a larger credit portfolio and a larger credit history, you'll need to go through a phase where your credit score is lowered as you apply for new credit cards in the short term.

So when it comes to doing all of this, here is my advice: if you're planning to finance any large purchases over the next six to eight months, like a car or a house, do not open up any new lines of credit. To me, this is just too risky to do, and you risk lowering your score at a time you need it the most, and that can be absolutely detrimental to your loan.

However, if you have no upcoming plans to finance any large purchases over the next eight months, then I think it's pretty safe to say that you're safe opening up new lines of credit. Take the hit short-term knowing that long-term, you're gonna come out ahead even stronger. I do this myself as soon as I buy a property. Like, as soon as that loan closes, I will go and apply for new credit cards to get the sign-up bonus knowing that by the time I buy my next property within about 12 to 16 months, my credit score will be back to normal and I get the new lines of credit.

So anytime you go and do this, just at least plan ahead, be strategic about it, and don't do this anytime you're within about 8 months of making a very large purchase that you're going to be financing.

Now, number four: the fourth biggest ruiner of credit scores, and this is also probably one of the ones that's so easily preventable from everything here, and that is by not closing any old credit lines that you have open. This is something that can have a hugely detrimental effect on your credit score without even realizing it. That's because the average length of your credit history makes up 15% of your credit score.

So when you go and cancel an old credit line, you inadvertently lower the average age of your credit history. This is why it's so important to keep your oldest accounts active and open even if you never use them because this weighs down your credit history, showing that you've opened it longer.

Even though this one makes absolutely no sense to me, when you go and cancel an old credit card, it also cancels the active account length of that card as well. I don't get this one either, but for some reason credit report agencies love only factoring in active account history, not total account history. It doesn't make sense to me whatsoever. I think they should go based off total account history, but you know what? I didn't make the rules. This is just the way it is.

So anyway, always, and I repeat, always keep old credit cards open and active even if you never use them because doing that will affect your score about fifteen percent from the average account history.

Finally, number five: the fifth ruiner of credit scores, and this is something that I was so guilty of until I was about 21 years old. This is so common; I see so many people making this mistake, and it's the worst. That is by not having any credit history at all. These are the people who pay for everything with a debit card. These are people who pay their car off in cash. These are the people that never borrow any money whatsoever because they don't need to, and to them, that just means debt.

Trust me when I say this, but I was this person growing up. Even though you would think that these are the people who should have the best credit score possible because these are the people who have never needed to borrow money, the entire system when it comes to this is backwards. If you don't have any credit history whatsoever, you're just an unknown to lenders, and they have absolutely nothing to go off of.

Because of that, no lender will ever loan you money for a house, a car, or anything you want to finance in the future, even though you could be the best borrower in the world. Because you've never needed to have a credit card, lenders don't see it that way because they want proof that you've handled debt responsibly and you can actually pay it off.

This system is so backwards because even with someone who has just a few credit cards and maxes them out and pays late and has a terrible credit score, they're still going to, chances are, get the loan at a really high interest rate than someone who doesn't have any score whatsoever who's just denied because of that.

Having something on your report, even though it's negative, is still better than having nothing on your report at all. I had to learn this lesson the hard way when I was 21 years old. I was making about $100,000 a year as a real estate agent. I had no debt whatsoever, had never had a credit card before, had paid off my cars in cash, had basically nothing to my name except for a high income and cash.

However, when I wanted to go and buy an investment property, even though I offered like 20, 30, 40, or 50 percent down, every single lender said no. They were not going to lend to me because I had no credit history whatsoever. It sounds so stupid to say this, but had I just opened up a credit card when I was 18 years old, gone and put a McDonald's on it once every six months, and then just paid it off, I would have probably gotten approved for that property rather than having no credit history whatsoever.

So if this one sounds like you, just learn from my mistake and get a credit card. Just get something! Even if you go and spend $2 on it every single month and you pay it off in full, that is going to be a thousand times better than never having a credit card at all.

So with that said, those are the five biggest credit card mistakes that can absolutely ruin your credit score without even realizing it. That's totally preventable. When it comes to the foundation of building your wealth, investing, and eventually becoming Lambo-rich in the future, I really believe that building your credit and smashing that like button—if you haven't done that the first time—is really one of the most important things that you can do that will set you up for the rest of your life.

So with that said, you guys, thank you so much for watching! I really appreciate it. If you guys enjoy videos like this and you haven't already subscribed, make sure to smash that subscribe button and smash that notification bell as well so YouTube can notify you anytime I post a video. Also, feel free to add me on Instagram; I post it pretty much daily. So if you want to be a part of it there, feel free to add me there.

Thank you again for watching, and until next time!