In the world of personal finances, there are certain habits that can hurt your credit score. A credit score can be essential to good money health. But these magic three-digit numbers kicked out by the scoring agencies are usually different for the same individual, who has just a single set of borrowing data. The agencies apply their own formulas to your numbers. You can keep your score on the upside by avoiding a few bad habits.
These are the habits that can hurt your credit score:
5.) Lack of Attention
Many people don’t trouble themselves with attention to their own credit report. But with credit scores, ignorance isn’t bliss—it’s important to keep up with this information.
Not paying attention to your credit report might leave you at risk of dentity theft, which will hurt your credit score.
Somebody could borrow under your name and fail to repay it. This could hurt your credit history, and if you do not look at your score, you won’t be able to act on the theft immediately.
Pull your own credit report; a federal law requires the credit bureaus to provide it for free at least once a year. Study the entries on the report, and contact the agency to correct any errors. A good, hard look at your credit history may change your borrowing habits for the better.
4.) The Cancellation Contradiction
If it’s good to reduce the number of accounts, it would also seem wise to just cancel them all, but no. Taking scissors to your entire plastic collection will hurt your ratio of debt to available credit, which makes up around a third of your credit score.
Cancellation of your cards can hurt your credit score, especially for old credit cards. Why? Because one of the factors in calculating a credit score is the average age of credit accounts.
While the average age of your accounts isn’t typically the most important factor used to calculate your score, it does matter. If it falls, it can negatively impact your credit health. An old account serves as a marker for your credit history. So, if you decide to close it, it will make your credit history shorter. As a result, it’s better to do a credit upgrade or downgrade.
However, if you still want to cancel your credit accounts in a way that won’t hurt your credit score too much, you can space the closures over time, which should reduce the impact on your overall credit health.
Remember, too, that cards are good as an emergency backup; if you need money right now and don’t have any credit, you’ll have to get the money from somewhere that might create a bigger financial burden than you need.
3.) Too Many Cards
Who can resist that friendly credit card application that just arrived in the mail? The lender makes it as easy as possible, requiring only your address, phone number and your estimate of how much you earn every year.
The result is yet another card and another bill-due date that’s easy to miss. If you have a lot of accounts going, then your credit score will get hurt.
What hurts your credit score is not necessarily the number of credit cards you have but your ability to manage them.
Carry one or two at the most; this makes it easier to keep up on payments and avoid the temptation to use your cards too often.
According to Investopedia, if you have been using credit cards for several years, it may make sense to add a card to obtain a lower interest rate or to transfer a balance to a zero-interest card, but you need to focus on keeping your debt-to-credit ratio below 30 percent.
2.) Minimum Payment Mistakes
You may be paying all your bills on time, and that’s great, but if you’re just paying the minimum to keep everything current, you’re risking a visit to revolving-credit hell. In this place, the high interest keeps piling up, you pay interest on the interest and the high cost of holding that little plastic rectangle damages your finances.
The credit card company’s charges will actually keep your bill growing every month. Also, making a minimum payment on your credit card can affect your credit utilization; i.e., the ratio of your credit card balances to credit limits. If you’re paying only the minimum and making additional purchases on your card each month, your credit score is likely to suffer because your balance grows rather than shrinks.
So it’s best you increase your credit payment. Although it might seem like you are not saving money, you are. Depending on your interest rate, you’re saving an average of 10 to 29 percent per year in interest on any balance that you manage to get off your cards.
That means that if you pay off an extra $1,000 this year, you’re actually coming out $160 to $290 ahead. Credit experts advise charging only what you can afford to pay off every month and not letting those balances rise. Credit companies also consider people with high balances who only make minimum payment as risky borrowers and may turn down their loan applications.
1.) Other People on Your Card
While data breaches might be one of the most common things that could hurt your credit score, somebody close to you can also hurt your credit score.
According to a data report by Javelin Strategy and Research in 2014, 550,000 victims of fraud and identity theft had their credit compromised by someone they knew.
So, it might be best to keep your credit card to yourself. Allowing a friend or relative to use the card, no matter how trustworthy they may be, tends to run up your balance and pile on more interest.
This lowers your available credit; this number is an important part of all credit score formulas, and when it’s heading down, your score usually follows. Keep your available credit high. Don’t lend out your card and use it only when you have to.
Also, adding someone to your credit card account as an authorized user can further hurt your credit score. By adding another person on your credit card, the individual has the ability to make purchases, but it’s up to you to make sure they pay for those expenses.
In other words, you bear the responsibility for whatever happens on the account. So, in a situation where an authorized user racks up some costly purchases or charges and fails to make timely payment, it could hurt your credit score.