Tristan Powys (Credit Counsellor) @ Lucid Living
If you’ve been trying to boost your credit score—which is a good idea, since people with higher credit scores tend to pay lower interest rates on loans—you might be going about it all wrong. It turns out that many people don’t know just what helps, and hurts, their credit scores. Here are six ways you might be accidentally damaging your credit score:
1. Avoiding credit altogether. While living a debt-free life sounds like a good idea, it can actually make it harder to take out a loan when you want to. That’s because lenders look for experience with managing debt—they want to see that you can make consistent, on-time payments each month—before deciding whether or not to issue you any more of it.
2. Comparison shopping. While checking around for the best price is a savvy move in theory, in practice, it can ding your credit score. When you call different lenders to check on mortgage rates or car loans and they issue you a quote, they first check your credit history with the credit bureaus. That can look like you’re preparing to take on too much debt, which concerns lenders. While the impact isn’t huge, it can hurt people with limited credit histories more, because they don’t have much experience to balance out the negative impact from the credit checks.
3. Closing accounts. After paying off a credit card debt, you might be tempted to shut down the account for closure. But that move can actually hurt your credit score, because lenders look for experience with long-held accounts. If you’ve had that credit card for a long time, consider hanging onto it even after you pay it off, because it reflects well on your ability to manage credit over time.
4. Lowering your credit limit. While you might want to lower your credit limit, to prevent a card from racking up a huge bill, think again, because lowering your credit limit can hurt your credit score. That’s because you appear more credit-worthy if you are using only a small portion of your overall available credit.
In fact, if your total debt on a card approaches the credit limit level, then your credit score can get dinged. People with the highest credit scores tend to use about 10 percent of their total credit limits.
5. Opening up a retail card account to snag a discount. It might sound logical to open up that retail store card so you can get the 10 percent discount on your purchase—but doing so could hurt your credit score. That’s because opening up new accounts can set off a red flag that you’re taking on too much debt, which can send lenders running in the other direction.
6. Maintaining a small credit card balance from month-to-month. Making only a minimum payment on a credit card, or paying anything below the full amount due, leads to more debt along with interest and fees. But some people carry that debt anyway, because they erroneously think it shows they can manage and maintain their accounts. To lenders, though, it can just look like the borrower is getting in over his head, which can eventually trigger higher interest rates on the account. So pay off that monthly balance whenever possible, and as soon as possible.
Given all these misconceptions, it’s no wonder that credit reports can be extremely confusing. In fact, a survey by ING Direct found that only five parents out of 1,042 could correctly identify many common behaviors, including closing old credit card accounts and never having a credit card, as damaging to credit scores. (But over 80 percent knew that paying bills late or paying a mortgage late could ding their credit scores, and seven in 10 correctly named “exceeding a credit limit” as a bad idea.)
The survey also revealed that many people falsely believe that recommended behaviors, including checking credit reports, can hurt credit scores. But financial experts recommend checking your credit report at least once a year. You usually have to pay to obtain your actual score, but getting the report alone will allow you to check for mistakes.
Take time to take care of your credit, and you’ll thank yourself when it’s time to take out a big loan.