The better your credit score, the less you’ll pay for some expenses like auto and homeowners insurance. You’ll also save money with lower interest rates on loans and credit cards. Knowing how the bureaus calculate scores is critical so that you make smart money choices. Here’s a look at six habits you might not realize are hurting your credit score.
#1 Paying only minimums
If you can only afford to make minimum payments on your credit cards, you’re probably carrying a too-high balance. Ideally, you should pay off your credit cards in full each month. If you can’t afford to pay off balances, you’re overcharging.
Credit card activity keeps you in good standing with your card issuer. Charging items like Netflix, your cell phone bill or auto insurance is a good way to use your plastic without getting in over your head. Ideally, keep your balances below 20% of your credit line.
#2 Opening new accounts
One of the factors in your credit score is new credit. Periodically opening new accounts can boost your score. However, it’s a double-edged sword. When you seek a new account, the creditor runs a hard inquiry on your credit report that lowers your score.
This is short-term only, though. Once the new account is open, it can boost your score by lowering utilization. However, if you pursue too many new accounts, the credit inquiries drag down your score, and it also lowers your average age of credit.
#3 Closing old accounts
Closing old credit accounts can also lower your credit score because it reduces your average age of credit. The longer is your credit history, the higher your credit score. When you close old accounts, it hurts your score in two ways.
First, it drops your average age of credit. Second, if it’s a revolving account, closing it drops your total credit lines. If you’re carrying a balance, without increasing the dollar amount, your utilization goes up, and that will drop your score.
#4 Not using credit
Some people decide the best way to protect their score is to avoid debt and credit altogether. Millennials, in particular, tend to avoid credit and try to get by on a cash basis. It might seem financially healthy to avoid debt, but it hurts your credit score.
Without a credit history, you won’t have a good credit score. You must show that you can use credit and do so responsibly to have a healthy score. In some cases, if you entirely avoid credit, you’ll have no score at all. If you want a car loan or mortgage, you’ll be out of luck.
#5 Making late payments
Your payment history is one of the most important aspects of your credit score calculation. Making even one late payment can tank your credit score – dropping it by 100 points (or more). You might think one missed payment is no big deal, but that’s just not true.
Late payments are a sign of poor financial management skills and make you too risky for creditors to finance or if they do, to only offer it at high rates of interest. History is the single largest component of your credit score at 35%.
#6 Not checking your credit
Ignorance is not bliss when it relates to your credit score. You should be checking your credit report a few times a year to check for errors, fraud, and other items that can drag down your score. Monitoring your credit score can help you catch identity theft early.
Mis-posted payments, fraudulent accounts, and errors can all reduce your credit score unfairly. The longer these linger, the harder it can be to correct them, and the more your score could drop. Don’t let it happen!
To find out more about building better habits, check out Credit Score Keys.