If you’re one of the millions of Americans who are just starting to feel better about your financial life and are beginning to open your wallet again, here’s something you should know:
There are ways you could be ruining your credit and not even know it.
Now that we’re all breathing a sigh of relief that our way of life hasn’t collapsed around us, we may be in the mood to start flexing our credit muscles again. But before you do, take a look at these seven credit mistakes to avoid.
1. Ramping up your credit spending too quickly.
Even if you are feeling more comfortable with your earnings and your job security, be careful about going out and charging a lot on your credit card.
The credit rating agencies get notified of your credit card usage and they track it to see if your debt-to-credit ratio is increasing. This is also called your credit utilization, and it counts for as much as 30 percent of your overall credit score.
If you go over the percentage they consider your utilization threshold, you could see your credit score drop quickly.
2. Paying off all of your card debt.
Most people would consider this a good financial move now that they can afford to do it. Unfortunately, the credit bureaus don’t see it this way.
Carrying a zero balance impacts the payment history portion of your credit score. You see, as soon as a card is paid off, it becomes part of your credit history.
This actually impacts your score because credit history is not as valuable as payment history.
3. Consolidating your credit card balances.
If you have a credit card with a low interest rate, you might be tempted to consolidate other cards onto that one. Well, resist the urge.
By doing this, you run the two-fold risk of exceeding the debt-to-available-credit on the card and also dropping the other cards to a zero balance. (See #2.)
“The more you know about what affects
your credit score, the better off you are.”
4. Shopping for a new car.
You may also feel like rewarding yourself by buying a new car. While this isn’t a bad move on its own, it needs to be done carefully in order to not impact your credit score.
Any large loan application will generate a “hard inquiry” of your credit report. Too many of these and your score will drop quickly.
To avoid this happening, shop around without providing your financial information to the dealerships until you are ready to buy, and then only supply it to the dealer you are buying from.
5. Getting a store card.
We’ve all been at the department store checkout and had the employee ask us if we want to open a store card for an additional discount off our purchase. Well, this can also cause a hard inquiry of our credit history.
One of them every six months or so will probably not be too bad, but more than that and you could see a negative impact.
6. Closing your credit card accounts.
If you’ve paid down balances on some cards or just want to reduce the number of cards you carry, be careful. The credit lines you have open all contribute to your available credit.
If you close the account, that available credit disappears – potentially causing your ratio of debt-to-available-credit to rise. (See #3.)
7. Refinancing or getting a home equity loan.
As with other large purchases, a credit inquiry will be generated for any refi or heloc loan you apply for.
Since it’s possible that many potential lenders will be contacted and will run credit checks, your score can drop seemingly overnight.
The more you know about what affects your credit score, the better off you are. Take the opportunity to educate yourself by reading more of our credit-related tips. And remember to use your credit wisely.
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