5 common credit score mistakes

By UK CreditCards.com

Most people know that missing a credit card or loan payments will negatively impact your credit score. However, even small, inadvertent mistakes can drag down your score.

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Here are five of the most common mistakes that ding consumers' credit scores.

1. Failing to register on the electoral roll
Individuals need to be registered on the electoral roll in order to vote in elections. This leads to the common misconception that if you don't want to vote, you don't need to register.

Whilst technically true, Neil Munroe, External Affairs Director at Equifax, says that "the electoral roll is used by many companies for identity verification purposes in order to combat identity fraud".

Not being registered on the electoral roll could make it very difficult for you to obtain any form of credit, such as loans, overdrafts or credit cards. In fact, Mr Munroe states that "not being on the electoral roll could mean your credit application doesn't even get past first base".

You can apply to go on the electoral register at any time by writing to your local authority.

2. Missing payments
It is well known that missing credit card and loan payments will hurt your credit score. However, other missed payments, such as utility payments, matter as well.

Late or missed payments will affect your credit rating and will stay on your credit report for at least three years.      

Some firms,including mobile phone companies, insurance companies and some energy companies, will share late or missed payments with the credit reporting agencies. 

James Jones, a spokesperson for the credit rating agency Experian, says that one of the most common mistakes is "failing to make agreed monthly payments on time, perhaps because you've gone away on holiday."

Unfortunately, making small mistakes like this can have big consequences if you are not careful. "Late or missed payments will affect your credit rating and will stay on your credit report for at least three years," says Mr Jones.

3. Applying for multiple lines of credit in a short period of time
When in need of credit, most people decide what form of credit they would like and submit an application. However, if you are unexpectedly rejected, this should act as a warning signal and not spur you on to apply elsewhere.

When a lender receives your application, they make an inquiry by pulling your credit report. The more inquiries against your name, the more likely your credit score will be hit.

If you are rejected for credit, don't just apply for another loan. Instead, find out why you were rejected.

Under the Data Protection Act 1988, the three major credit rating agencies, Equifax, Experian and Callcredit, are required to provide you with your statutory credit report for a maximum fee of £2. 

4. Not using all your open credit card accounts
How often do you close down any old credit card accounts that have been lying dormant for years? Not that often I bet. Mr Munroe from Equifax explains how this could be harming your credit score without you knowing anything about it.

"Financial companies are paying more attention to the total amount of credit available to an individual and whilst you may not be using them, dormant accounts could affect your credit score."

If the account helps you show a responsible long-term credit history, then use the card every so often in order show the account is still active. Otherwise, you may want to close the account.  

5. Spending close to your credit limit
The higher the balances are on your credit cards, the more likely it is that your credit score will be reduced. That's because an important component of your credit score is your credit utilisation rate, which refers to how much of your total available credit you are using. For example, if you have a credit card with a limit of £5,000 but you only have a £1,000 balance, your utilisation percentage is just 20% of your total credit limit.

The closer you get to your credit limit, the more points will be knocked off your credit score. "It is important to avoid carrying a balance that is more than 30% of your credit limit," says Mr Munroe. "Lenders may view this as excessive debt and that you may not be able to keep up with repayments."

The bottom line: Credit scores can be a very complex and grey area. However, if you avoid these common credit score mistakes and ensure that, where possible, you pay off outstanding balances in full each month, your credit score should start to see an improvement.

See related: What to do when your credit card application is declined; How to get your credit report, score

Published: 7 October 2011