5 Credit Mistakes To Avoid in 2021

5 Credit Mistakes To Avoid in 2021

Posted on June 9, 2023

Before you start thinking about shopping for a new car, we recommend thinking about the car loan first. Ideally, you want the best car loan available which means getting the lowest interest rate possible. The better your credit score is, the better the car loan you will get.

That is why we like to say working on your credit score is actually the best first step when it comes to car shopping. We put together a list of things to consider when it comes to your credit history. Avoiding these common credit mistakes will help you get a better car loan when you finally decide to buy.

#1 Closing A Credit Card Account

Once you pay off a credit card completely, it might feel like a great idea to just close the account and move on with your life. But we suggest holding off… at least for a little bit. 

Most lenders like to see that you are able to manage different types of credit for long periods of time. So the longer you have a credit account open (like a credit card), the better it is for your credit score.

Closing a credit card too early might also increase your debt-to-credit ratio, which can bring down your credit score. The more credit you have available to you, the more reliable you look as a borrower.

Main Takeaway: Keep that paid credit card account open. No need to spend any more money on it — just keep it in your back pocket as a credit boost when it comes time to apply for a car loan.

#2 Making A Late Payment Here or There

So you were a couple days late on your last phone bill. No big deal, right? Wrong. Every late payment you make on a bill stays on your credit for up to seven years from the date of the missed payments.

Some credit bureaus report that even one late payment can cause as much as a 180-point drop on your credit score, depending on your history and how big or late the payment was.

Main Takeaway: Payment history is one of the biggest factors lenders consider when approving you for a car loan. One late payment might make all the difference when it comes to getting the loan you want at the right rate.

#3 Paying Off The Wrong Debt First 

Most of us tend to look at our debts and instinctively aim to pay the biggest one off. But instead of looking at the amount you owe, we suggest looking at the interest rates on each loan instead.

The higher the interest rate, the more it is costing you to borrow that sum of money. The most efficient way to lower your debt is to focus on where you are paying the most in interest and lower that amount first.

Main Takeaway: You have two credit cards. Credit Card #1 has an outstanding balance of $1,500 and an interest rate of 14%. Credit Card #2 has an outstanding balance of $1,000 and an interest rate of 19%. It is more beneficial to pay off Credit Card #2 first because that is where you are paying the most amount of interest.

#4 Not Having a Clear Picture Of Your Debt

This is probably one of the most common credit mistakes people make. We recommend taking an evening and assessing your debt situation… before you apply for a car loan.

Questions To Ask Yourself

• What credit cards do you have open?
• What are their interest rates?
• When do promo interest rates end?
• How long have your credit cards been open?
• What additional fees am I paying on which credit cards?
• How many late payments are on my credit report?
• What is my credit score?

Main Takeaway: Knowledge is your secret power when it comes to your credit. Have a solid understanding of your financial situation and review your credit report annually.

#5 Carrying a Credit Card Balance Month-To-Month

People often think carrying a credit card balance over into their next month helps improve their credit. The opposite is actually true. Having an outstanding balance on a credit card each month means you are using more credit (higher utilization rate), which lowers your credit score.

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