Everybody knows that having a good credit score will allow them to buy a home or a car and get a lower interest rate while they are doing so. What some might not be aware of are the small things they do that lower their credit score over time, and these small things add up quickly to knock your score lower and lower.
1. Using too Much of Your Credit
It makes sense that if a store allows you to open a credit account with them and gives you a large credit line, you should be able to use it. While it is true you can, you can also be dinged by the credit scoring agencies when you do.
One way your credit score is calculated by the rating agencies is with the credit utilization ratio. This is determined by dividing the amount you have charged by the credit limit you have available to you.
For example, if you have a credit limit of $5,000 and you have charged $4,000 then you have a ratio of 80 percent. Credit experts suggest that a credit utilization ratio should be below 30 percent, so if you have large balances on your credit cards, you should consider reducing them to below the 30 percent ratio to increase your rating.
2. Late Payments and Unpaid Fines
It pretty much goes without saying that if you pay your bills late, you will get dinged on your credit score, but what about payments and fines that have nothing to do with your credit cards or loans? Those can hurt you as well.
This includes things such as unpaid parking tickets, a homeowner’s association fee or fine, or even a bill from your doctor. While these are not reported to the credit agencies, if they end up at a collection agency, they will then make their way to your credit rating, and you will see it drop. So, be sure to pay any fines or bills unrelated to your credit cards or loans promptly.
3. Opening too Many Credit Card Accounts in a Short Period of Time
Chances are when you go to your mailbox you will find offer after offer for a credit card. Many of these are pre-approved and seem to be begging you to take their money. Then go to the mall on any given day, and you are bombarded with credit card offers from just about every store in the mall.
These can be tempting, especially if you have a few extra bills to pay or around the holidays for some extra spending money, but be careful. If you open too many credit accounts in a short period of time, you will see your credit rating go down. Instead, use one or two accounts and keep them for the long term. Credit agencies like to see predictable and stable credit use.
4. Closing Credit Accounts
It may seem counter-intuitive, but closing credit accounts can actually damage your credit score. This goes back to the credit utilization ration. For example, imagine that you received a $1,000 bonus at work. You have a credit card with a balance of a thousand dollars so you decide to pay off your credit card. Also, assume that the card has a credit limit of $2,000.
Once you pay the credit card off you have $2,000 credit available, but if you close the account your available credit is decreased by that $2,000. If you have other debt, this will increase your credit utilization ratio and thereby hurt your rating. The best option is to go ahead and pay off the credit card but keep the account open with a zero balance.
5. Using a Debit Card to Rent a Car
While most car rentals require a credit card to rent a car some allow you to use a debit card. The issue is that the car rental company will pull a credit report to check your credit. This is considered a hard inquiry and will actually lower your credit score by a few points. A hard inquiry is when a company pulls a credit report to determine whether or not they will extend credit to you.
6. Not Using Your Credit Cards for a Long Period of Time
If you have paid off your credit card and haven’t used it for an extended period of time, the credit card company may close your account. This will have a negative impact on your credit due to the lowering of your overall available credit. Just be sure to keep an eye on your zero balance accounts.
The inner workings of credit card companies may leave you scratching your head, but for better or worse, they are here to stay. Just keep these six tips in mind, and you shouldn’t damage your score unintentionally.
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