Maintain a healthy score by avoiding these common credit pitfalls.
Whether you’re looking to rent an apartment or start a cellphone contract, your credit score matters. Lenders and third parties look to your score to indicate if you’re a risky borrower, and it can determine whether you’re able to get application approval for that Nashville, TN, apartment — or whether you’ll be living in Mom and Dad’s basement for another year.
Clearly, your credit score is an important component of your financial health — and your credit card habits and history are major contributors to this score. But the average credit score is a lukewarm 667, according to a recent Experian study. If you’re looking to improve your credit score — or simply maintain the score you have — make sure to avoid these six credit card pitfalls.
1. Racking up a high credit card balance
Even if you’re paying off your credit card bills in full each month, you may still be hurting your score by how much you’re spending. Your debt-to-credit utilization ratio — how much debt you’ve accumulated on your credit cards divided by the credit limit on the sum of your accounts — comprises 30% of your credit score. If you want a good credit score, you need to keep your credit utilization ratio relatively low. A good rule of thumb: “Shoot to keep your balance to no more than 10% of your credit limits,” says independent credit expert John Ulzheimer.
2. Developing a habit of making late payments
Payment history comprises a whopping 35% of your score. Translation: Even missing just one credit card payment can substantially hurt you. Fortunately, there are some steps you can take to prevent this. One option is to set up automatic bill pay by linking your credit card to a checking account. Alternatively, you can set up text message or email alerts to remind you when a payment is due. Still paying by snail mail? “Allow plenty of time for the bill to get there,” says Bill Hardekopf, CEO at LowCards.com. “Problems with mail delivery are not an acceptable excuse to an issuer for your late payment.”
3. Not checking your credit report
Every 12 months, you’re entitled to a free copy of your credit report from each of the three major credit bureaus: Equifax, Experian, and TransUnion. Because errors can appear on your report for reasons outside your control — such as someone sharing the same name as you and the bureaus mixing up your accounts — you need to vet each report. In fact, one in four Americans has spotted errors on their credit reports, according to a 2013 Federal Trade Commission survey. Because it can take time to get errors removed, you’ll want to be proactive and contact the credit bureau immediately if you notice an issue. Take note: Your credit report includes only your credit history — not your numerical credit score. (You can use myFICO.com’s free score estimator to get a rough idea of your score.)
4. Opening too many credit cards at one time
Every time you apply for a credit card, you trigger a “hard inquiry” on your credit report, which dings your credit score by up to five points. Although a slight ding may not seem like a big deal, opening multiple cards back to back could significantly damage your score. Also, each time you open a new credit card, you shorten the average age of your credit accounts; this can hurt your length of credit history, which constitutes 15% of your score.
5. Closing old credit card accounts
If you close an account, it reduces the average age of your accounts and lowers your available credit limit — a double blow to your score. Make sure you charge a purchase to each credit card at least once per quarter; if you don’t, the credit card company could perceive the account as inactive and potentially close it without giving you advance notice, says Beverly Harzog, a consumer credit expert and author of The Debt Escape Plan.
6. Carrying a balance
OK, this tip doesn’t boost your credit score, but it will save you money, so we feel compelled to mention it. Carrying a balance from month to month could mean you’re effectively wiping out any points or cash back you earn — even on a rewards card. “[Carrying a balance] doesn’t seem like a big deal when the debt is small, but compound interest on the balance can make your debt go from small to huge before you know what’s happening,” says Harzog.
The moral: Pay off your credit card balances in full and on time each month. “Credit cards are a tool to help build credit,” says Harzog. “They should not be used as a substitute for a personal loan.”