What Am I Doing Wrong With My Credit?

If you want to improve your credit, you need to look at your finances from a different point of view: a lender’s.

Credit histories and scores are designed to give financial institutions an idea of what kind of borrower you are; the data help them decide whether taking you on as a customer is worth the risk.

Getting inside a lender’s head can help you build and maintain good credit scores, because you understand what you need to do in order to look appealing. Looking at your credit reports will help in this process, as will free tools like Credit.com’s Credit Report Card, which breaks down your credit profile to these five categories, assigning a letter grade to each as a way of showing you areas that need attention.

If you see you have less-than-stellar credit scores, you’re likely doing one or more of these things.

You Don’t Have a Good Mix of Accounts

There are different types of credit — revolving and nonrevolving accounts — and having too few or too many of one type can be seen as a negative by lenders. Quick overview: Revolving accounts have a set line of credit you can repeatedly borrow and pay off, like a credit card, and nonrevolving accounts are disbursed once to be repaid over a set period of time (mortgages and car loans are good examples).

There’s no magic ratio of account types that maximizes your credit score, but diversity is very important, and lenders look on some accounts more favorably than others. For instance, consumers with mortgages are generally viewed as less risky than those without, and a large collection of credit cards can raise red flags.

While it’s important to strive for a diverse credit portfolio, it’s unwise to take on debt with the intention of boosting your credit scores. This aspect of your credit history is a relatively small part of credit scores anyway: 10%.

You Haven’t Been Using Credit Long

When it comes to credit age, older is better. This has nothing to do with your biological age, except that older people have had more time to build credit. But a 25-year-old could have a better credit age than a 40-year-old, if the younger consumer got started as a teenager and the 40-year-old hasn’t been using credit.

This component factors in both the age of your oldest account and the average age of all your accounts. Having at least seven years of credit history will improve the points you get from this category, which makes up 15% of your scores, and the only way to get there is to start using credit and be patient. Opening new accounts will lower your average, which isn’t to say you shouldn’t open new accounts when necessary, but it should be done carefully and with the knowledge of how it will affect your credit scores.

You Shop for Credit a Lot

Each loan and credit card application results in a hard inquiry on your credit report, because the lender is looking at it to assess the risk of extending you credit. Having a lot of these in a short period of time (they stay on your report for two years, but only affect your credit for one year) may turn off lenders, because they see that as taking on more debt, which may reduce the money you have available to repay them.

Not all inquiries have this impact. Soft inquiries — when you request your report, an existing creditor of yours looks at it, or a lender is considering soliciting you for a product — do not have an adverse impact on your credit scores. Hard inquiries are within your control, and they’re necessary to attain credit, so minimizing them will help you maintain or improve your scores (inquiries account for 10%).

Something to note: There’s a rule that applies to mortgage and auto loan shopping that counts multiple inquiries made within a short time period as a single inquiry so consumers can find the best deal without worrying about excessively hurting their credit.

You Pay Late

We live in a world that values punctuality, and credit is no different. Bills have due dates, and missing them looks bad. Really bad. Payment history accounts for 35% of credit scores, making it the most important part of your credit profile.

Not only will you incur fees and interest when you pay bills late, it may be reported to the credit bureaus, appear on your credit reports and take a bite out of your credit scores. It may not seem like a big deal, but it is. If you don’t have the money to pay a bill, see if you can pay part of it on time, and address the issue with your creditor.

This is very straightforward: Do not be late.

You Have Too Much Debt

Even if you’re paying your bills on time, you could be messing up in another important category: credit utilization.

Say you have two credit cards, each with a $1,000 credit limit. During the holiday season, you spent a lot more than you usually do, putting $500 on each card. “It’s OK,” you say to yourself, “I saved up for this and I’ll be able to pay the bill in full and on time.”

That’s great for your payment history, but you used 50% of your available credit, which isn’t a positive in the eyes of lenders. It works like this: You add up all your available credit (in this case, $2,000) and add up all your balances on those lines of credit ($1,000) and figure the percentage of available credit you are using.

That number should be as low — lower than 10% if you can manage it. Translation: Keep your balances low (and credit limits high, if you can manage that).

Educated consumers who pay attention to their finances are much more likely to find financial success than their oblivious neighbors, so take advantage of the tools around you.