The document discusses common credit mistakes and their impacts on credit scores. The top mistakes include closing credit card accounts, missing payments, settling accounts for less than owed, over utilizing available credit, excessively applying for new credit, and not understanding that different scores are used. Closing accounts removes positive payment history and lowers credit utilization ratios. Missing payments, settling for deficiencies, and over utilization all negatively impact scores based on severity, frequency, and recency. Frequent credit applications result in multiple inquiries which lower scores. Different lenders use various scoring models to assess risk.

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Jelena Prichard
Assistant V.P./Mortgage Originator
Top 10 Credit Mistakes
1. Closing Credit Cards Accounts
Some of you may wonder why Closing Credit Cards is number one on this list as the biggest credit mistake even
above Missing Payments. Closing credit card accounts will not increase your credit scores. There are two huge
reasons not to close credit cards that you no longer use. They are:
 They will eventually fall off your credit reports – In most cases credit information will remain on your credit
files for no longer than seven years. Eventually the account will be removed permanently from your
credit reports. Why is this a bad thing? The answer to this one is very simple. It’s all about your
impressive past. If you have a perfect record of making your payments on time then this significantly
helps your credit scores so why would you ever want that history to disappear? You wouldn’t. What
should you do with old credit cards that you don’t use any longer? Use the card once every few
months for dinner or a low dollar item. Pay the bill in full. Doing this will ensure that the account will
never be closed and you’ll always get credit for your good payment history.
 You will hurt your “utilization” measurements – This is significantly more important than your closed
accounts eventually falling off your credit reports. Revolving Utilization is the amount of your revolving
credit card limits that you are currently making use of. For example, if you have an open credit card with
a $2,000 credit limit and a $1,000 balance then you are 50% “utilized” on that account because you’re
using half of the credit limit. This measurement is almost as important to your credit scores as making
your payments on time. If you had a second open, but unused, credit card with a $2000 credit limit and
a $0 balance then your aggregate revolving utilization is 25% because you have $4000 in credit limits
and $1000 in balances. $1000 divided by $4000 is .25 or 25%. How will closing an unused credit card
hurt your credit score? Let’s say that you closed that second unused credit card from the above
example. Once you do so then you remove it from any utilization calculation and now you’re stuck with
one open card with a $2000 credit limit and a $1000 balance. Now your utilization has gone from 25% to
50% (divide $1000 by $2000 and you get .50 or 50%). As this percentage increases, your credit score
decreases.
taken from www.credit.com
Jelena Prichard 708-B Windover 870-932-3564 Fax
Assistant V.P./Mortgage Originator Jonesboro, AR 72401 870-897-8789 Cell
870-932-3562 jprichard@firstcommunity.net
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2. Missing Payments
This is number two instead of one because it doesn’t take a credit scoring expert to tell you that missing
payments is a bad thing. Credit scores look at your credit history to see how you have managed your current
and past credit obligations in an effort to predict how likely you are to miss payments in the future. There are
three ways that missing payments will hurt your credit scores. They are:
 How Frequent are Your Late Payments? If you miss payments frequently then you will be
penalized much more severely than someone who misses payments infrequently. If you are not making
a habit of missing payments, don’t start.
 How Recent are Your Late Payments? Since scoring models are designed to predict how you
are going to pay your bills in the subsequent 24 months, it’s very common that they assign more value
to how you’ve managed your credit in the most recent two years. If you have late payments that have
occurred in the most recent two years then you are more likely to miss more payments in the next two
years. As such, your score will suffer.
 How Severe are Your Late Payments? The severity of your late payment also plays a big part in
your credit scores. This not only makes statistical sense but also common sense. Consumers who have
missed payments by only a few weeks and then bring their payments up to date are going to score
better than consumers who have payments that are 90 days past due or worse. If you have late
payments it is in your best interest to do all that you can to bring them up to date.
taken from www.credit.com
3. Settling with your Lender on a past due Account
“Settling” is a term used in the consumer credit industry that means accepting less than the amount you owe
on an account. For example, if you owe a credit card company $10,000 but you can’t pay them the full amount
then they will likely make you a deal for less than that full amount. They have “settled” for less than the full
amount, which is likely much less than you contractually owe them. This may seem like a good idea because you
are happy that you didn’t have to pay the full amount. However, the lender will report that remaining amount
to the credit bureaus as a negative item. This remaining amount is called the “deficiency balance”. A deficiency
balance is considered just as negatively by credit scoring models as any other severe late payments. If you can
arrange a deal with your lender so that they will NOT report the deficiency balance then that will be your best
course of action. If they will not agree to this then you have to figure out a way to pay them in full or your credit
will suffer for 7 years.
taken from www.credit.com
Jelena Prichard 708-B Windover 870-932-3564 Fax
Assistant V.P./Mortgage Originator Jonesboro, AR 72401 870-897-8789 Cell
870-932-3562 jprichard@firstcommunity.net
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3.
4. Over Utilization of Your Available Credit Card Limits
Having high balances on your credit cards will undoubtedly cause your credit scores to go down, and in most
cases, in a big way. The mistake you are making is called “over utilization.” Over utilization is the practice of
running up balances too close to your credit card limits. For example, if you have a Visa card with a credit
limit of $10,000 and a $5,000 balance you have a utilization percentage of 50% because you are using 50% of
your credit limit. The higher that percentage the fewer points you will earn for your credit scores. If your
balance is $9,500 then you will be 95% utilized and in big trouble. Your best bet would be to use your cards
sparingly and pay them down as much as possible each month. If paying your cards off every month is unrealistic
then try your best to keep that percentage as low as possible. There is no magic target to shoot at, but it’s safe
to say that the lower the percentage the better.
taken from www.credit.com
5. Excessively Shopping for Credit
Every time you fill out a credit application you are giving the lender permission to access your credit reports.
When they access your credit reports they automatically post what is called an “inquiry”. The inquiry is a record
of who pulled your credit report and on what date. Federal law requires that the lender post the inquiry. It also
requires that the inquiry remain on the report for 24 months.
Inquiries are used by credit scoring models to determine whether or not someone is shopping for credit. It is a
statistical fact that consumers who have more inquiries are higher credit risks than consumers with fewer
inquiries. As such, the more inquiries you have the more points you will lose in your credit scores. While the
exact point value is a closely guarded secret by the credit scoring companies you should assume that your scores
would suffer if you have an excessive amount of inquiries.
Probably the most troublesome by product of holiday shopping is the collection of inquiries that consumers end
up with. Think about this scene: you go to the mall to go shopping and are enticed by offers of “10% off today’s
purchase” in exchange for applying for a store credit card. This sounds like a great idea because you are saving a
few bucks on your purchases. But if you look at the big picture you will see that this is a horrible idea with dire
consequences. If those excessive inquiries cost your credit score 10, 20 or 30 points you could expect to pay
higher interest rates on either a future home or car loan. Either way, the thousands of additional dollars that
you will spend in interest far outweigh the $20 you saved at the mall.
taken from www.credit.com
Jelena Prichard 708-B Windover 870-932-3564 Fax
Assistant V.P./Mortgage Originator Jonesboro, AR 72401 870-897-8789 Cell
870-932-3562 jprichard@firstcommunity.net
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6. Thinking that all credit scores are the same...
Credit Scoring is already a confusing enough topic to understand. One of the most common myths about credit
scores is that there is only one credit score. Web sites or financial advisors who claim there is only one “real”
credit score are either misinformed or are being misleading. In fact, there are many different credit scores used
by lenders – some estimate more than 1,000 – although some scores are used more predominantly than
others. There are even some check approval services that have also develop risk models and scoring that are
based on check writing patterns in order to predict the risk of a particular check being returned. The most
commonly used credit score is a credit risk score. A credit risk score is designed to assist lenders by predicting
whether or not a consumer will pay their bills on time in the future. The most common credit risk score is
designed and developed by a company called Fair Isaac Corporation. This Minneapolis based company builds
the industry standard “FICO” score.
There are many different places where consumers can purchase their credit reports and credit scores however
not all of the scores being sold are, in fact, the authentic FICO score. You may also have more than one FICO
score as each of the three major credit reporting agencies collect and report information in slightly different
ways; since your credit score from each agency only uses the information contained in that agency’s report, it’s
possible to have three different scores.
When you are shopping online for your credit reports and credit scores be sure that the score you are buying is
branded as the authentic FICO® Credit Score. These can be purchased through various reputable web sites such
as www.myfico.com.
taken from www.credit.com, www.credit.about.com, www.experian.com
7. Thinking that all Credit Scores Predict the Same Thing
There are models that predict other things than general credit risk. Scoring models can be built to predict almost
anything including:
 Insurance Risk – That’s right. Insurance companies use credit scoring models to predict whether or not you
are likely to file an auto or homeowner’s insurance claim. A poor insurance score will mean that you will
pay higher premiums or be declined coverage outright.
 Response Rates – Raise your hand if you receive pre‐approved offers of credit in the mail everyday. There is
an incredible amount of science behind those offers and why you get them. It’s not random. You have been
selected from hundreds of millions of other consumers to receive that offer because you have a
“Response Score” that indicates you are more likely to respond to that offer than someone else who
didn’t get it.
Jelena Prichard 708-B Windover 870-932-3564 Fax
Assistant V.P./Mortgage Originator Jonesboro, AR 72401 870-897-8789 Cell
870-932-3562 jprichard@firstcommunity.net
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5.
 Revenue Potential – Credit card companies also use revenue scoring models to predict whether or not you
will use their credit card and, therefore, generate revenue for them.
 Collect Ability – For those of you who have collections on your credit reports you can feel certain that the
collection agencies assigned to collect those past due debts are also scoring you to determine whether or
not you are likely to repay your collections.
 Bankruptcy Potential – Bankruptcy scores predict the likelihood that you will file for personal bankruptcy.
You can assume that if you have a poor bankruptcy score that your credit applications will likely be declined.
 Attrition Potential – These scores predict whether or not you will stop using one card in lieu of another.
This is called attrition and it is considered the cancer of the credit card industry. If you have a score that
indicates that you are likely to attrite & start using another lender’s credit card then you should expect to
begin receiving special bonus offers as an effort by your current credit card company to dissuade you from
moving on to another card.
 Fraud Potential – Amazingly sophisticated, these models actually can predict whether or not a purchase
you are trying to make with a credit card is fraudulent or not. What’s even more amazing is that it takes
about 2 minutes to complete your check out at a store and in this short amount of time you have been
scored to see whether or not the retailer will accept your credit card.
taken from www.credit.com
8. Not Understanding Your Rights Under The Fair Credit Reporting Act
This act, commonly referred to as the “FCRA”, is a list of the rules and regulations that govern lenders and the
credit reporting agencies. You should become familiar with your rights under this act which can be accessed at
no cost at the Federal Trade Commissions web site, www.ftc.gov. Some highlights are:
Permissible Purpose – There are only eight legal reasons why your credit reports can be accessed. These are
called “Permissible Purposes.” Some of the more obvious reasons are:
 Consumer Disclosure – If you ask for a copy of your own credit report, this is permissible purpose.
 As Part of a Legitimate Business Transaction – If you fill out an application for credit then this gives the
lender permissible purpose to pull your credit reports.
 Your Right to Dispute Your Credit Information – Every consumer in the U.S who has a credit report also has
the right to dispute the information in that report if they feel it is incorrect, outdated or unverifiable. The
FCRA lays out the process and requirements on how to file a dispute and what kind of turnaround time your
lenders and the credit reporting agencies have to complete their investigation.
 Your Right to a Free Copy of all Three of Your Credit Reports – Recently the FCRA was amended by an act
called FACTA also known as the Fair and Accurate Credit Transactions Act. FACTA calls for national disclosure
Jelena Prichard 708-B Windover 870-932-3564 Fax
Assistant V.P./Mortgage Originator Jonesboro, AR 72401 870-897-8789 Cell
870-932-3562 jprichard@firstcommunity.net
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of credit reports for free. By September 2005 every person in the U.S can get a free copy of his or her three
credit reports. It’s easy. Go to www.annualcreditreport.com to verify your eligibility.
taken from www.credit.com
9. Not Knowing that you Have Three Credit Reports and Three Credit Scores
Most consumers understand that they have a credit report. However, most consumers do not know that they
have three credit reports compiled and maintained by three separate & competing companies called “Credit
Reporting Agencies.” These companies are essentially warehouses that store your credit history & sell it to
lenders who want to grant you credit. These companies are:
 Equifax (NYSE: EFX) – based in Georgia. www.equifax.com
 Experian – a division of an English based company called GUS (Great Universal Stores). Several years ago
Experian purchased the credit database that was formerly known as TRW Credit Services. They have U.S
corporate offices in California. www.experian.com
 TransUnion – Based in Illinois and privately held. www.transunion.com
Each of these companies maintains credit files on over 250,000,000 consumers, which they sell to lenders. They
do not share credit information with each other since they are competitors. As such, you will likely have a
unique credit report & credit score at each of these companies. Do not assume that your credit reports & scores
are all the same.
taken from www.credit.com
10. Not Having Credit (or a Credit Score)
Not using credit is a huge mistake. The way the credit system in this country works is that it rewards consumers
who manage credit responsibly. The reward is in the form of easy access to inexpensive loans. However,
choosing to not use credit will prevent you from building a solid credit history and score and will subsequently
make it very difficult to secure home or auto loans when the time comes. Secondly, not having a credit history
will result in you not having a credit score. Credit scoring models depend on your previous credit history from
which to generate a score. Not having a credit score will make it more difficult to apply for and obtain credit
because most lenders use automated systems in order to process your applications. A lack of a credit score will
make it more difficult for lenders to process your applications. Some will simply chose to decline your
applications rather than manually process them.
taken from www.credit.com
Jelena Prichard 708-B Windover 870-932-3564 Fax
Assistant V.P./Mortgage Originator Jonesboro, AR 72401 870-897-8789 Cell
870-932-3562 jprichard@firstcommunity.net
Partnered with: