Common Credit Score Mistakes to Avoid
Sometimes people accidentally damage their credit scores without realizing it through simple credit score mistakes.
Managing your credit is not just a matter of paying your bills on time — it also involves making the right decisions about how to utilize your overall credit options to help keep your credit profile in good shape.
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In the same way that you need to keep your resume up-to-date even while you have a job, managing your credit even when you don’t need a loan will help make you more creditworthy when the time comes to apply for new credit. Here are a few common credit score mistakes you can avoid to keep your credit healthy:
Closing Old Credit Card Accounts
Sometimes people think that they should close credit cards that they haven’t used in a long time, there are considerations before making this decision. That’s because closing old accounts could reduce your credit utilization ratio and change your length of credit history.
For example, if you have three credit cards and they each have a credit limit of $10,000 and you close one of them, you are reducing your total available credit from $30,000 to $20,000. If you carry a balance of $2,000 on each of the two remaining cards, you have just increased your credit utilization ratio from 13.3% to 20%.
Increasing your credit utilization ratio can impact your credit score, because it makes it appear that you are using up a higher percentage of overall credit, which could mean you are a riskier consumer. Consider the potential consequences when deciding whether to close older credit card accounts.
Not Using Your Credit Regularly
Another of the most common credit score mistakes is having credit cards, but not using them.
One of the most important aspects of using credit is building credit history: You need to make purchases and pay off your balances on time each month to prove to credit issuers that you are creditworthy and that you can use credit responsibly.
If you don’t have any credit history, you might get turned down for a loan when you apply for one to buy a car or house or other major purchase. Even if you just make a few small purchases each month with your credit card and pay them off in full every month, it helps to build your credit history.
If you’re afraid of racking up credit card debt, keep in mind that building your credit history doesn’t mean that you have to carry a balance or incur interest charges on those purchases; you can always pay off your balance in full each month.
Maxing out Your Credit Cards
On the other hand, it’s also a bad idea to go too far in the opposite direction by relying on your credit cards too much — to the point that you max out your cards and have no more available credit.
If you are borrowing up to your maximum credit limit, it could hurt your credit score by impacting your credit utilization ratio, especially if you struggle to make payments on time because late payments will impact your score.
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To learn more about how to maintain and improve your credit score, familiarize yourself with these common credit score myths.