Common sense tells us that not all advice can be good advice. While there are different schools of thought on how to best manage your credit or achieve the best credit scores, there are plenty of credit-boosting ideas out there that, if implemented, could instead tank your scores.
In order to separate the good advice from the bad, you need to know credit scoring basics. First, there are dozens of different scores out there, and you never know which model a particular lender may use. Rather than focus on the number, pay attention to what generally drives your scores: behavior. You’ll want to pay your bills on time, use very little of your available credit, establish a long history of good credit use, maintain a mix of credit accounts and apply conservatively for new lines of credit.
With that in mind, here are some practices you should avoid if you’re trying to improve your credit.
1. Closing Old Accounts
You may have heard the advice that you should close any accounts you don’t use anymore, but that’s usually a bad idea. First, it can raise your credit utilization — the ratio of credit that you use compared to your credit limits. Even if you rarely use that credit card with a $1,000 limit, keeping it open keeps that extra $1,000 in your available credit, giving you more room to borrow using other cards without hurting your utilization rate. Take it away, and you’ll either need to cut spending in order to protect your utilization, or you’ll suffer the credit-score consequences.
Credit utilization is the second-most important factor (after payment history) in determining your credit scores. Also important is the length of time a credit line has been open, so closing an old account can reduce the average age of your credit, causing your scores to sag.
You can see how your debt and credit limits compare by analyzing your credit profile with the free Credit Report Card — it shows you two scores used by lenders and highlights your credit profile’s strengths and weaknesses, so you can work to maintain or improve them.
Keep in mind that if you don’t use a credit card for awhile, the issuer may close the account or reduce your credit limit, so make sure you’re on top of all your accounts. Using a credit card once a month and setting it to auto-pay could be enough to keep the account open and your available credit as high as possible.
2. Carrying a Balance
Credit cards offer the luxury of paying later for something you want to buy now, but that’s an easy thing to misuse. Not being able to pay the bill in full is one thing (and you should put a plan in place to pay that debt down), but there’s no reason to carry a balance if you can afford to make the payment when it comes due. It’s a common misconception that carrying a balance will help your credit scores, said Gerri Detweiler, Credit.com’s director of consumer education.
“They don’t understand how things are reported, and they end up with high utilization,” she said. Basically, if you continue to make purchases on your credit card without paying off the balance, you’ll end up using more and more of your available credit. Factor in the extra money you’ll owe in interest, and carrying a balance isn’t a ticket to the high credit scores you want.
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