Think you know how to use credit responsibly? Regardless of whether you’re in debt, or pride yourself on our net worth, there are some common ways people frequently damage their own credit, without even knowing. Here are four accidental ways you may be negatively impacting your credit score.
1. Closing old accounts. Not sure whatever happened to that credit card you signed up for freshman year in college in order to charge spring break, and score a free t-shirt? Don’t pack it away with your old college frat party tee’s just yet. Even if they’re not actively in use, the credit cards you’ve owned the longest that remain in good standing have a positive impact on your credit history. Keep them open, to keep your score high.
2. Overprioritizing the reward you get from rewards cards. I’m a huge fan of the $100+ dollars a month I get back from my own Chase Sapphire rewards card, but I know that it’s not without a cost to my credit in terms of the amount my family charges each month–even though we pay it off in full, and never a pay a dime of interest. According to credit expert John Ulzheimer at Smart Credit, those credit utilization “goals” of 30-50% that are commonly recommended are incredibly overstated. Ulzheimer says the range you should shoot for is far lower, at about 7%. If you’re charging everything to get points, you’re impacting your credit score. It may not matter if you don’t intend to apply for credit in the near future, but if you are going to buy a home, finance a car, or apply for a mortgage refinance, the impact charging for points has on your credit scores will ultimately cost you more than your rewards offer.
3. Spreading balances across credit cards. If you’re using a few cards each month in an attempt to “manipulate” your debt utilization scores so you stay farther away from the credit limit on each, it actually doesn’t “fool” the credit bureaus into sparing your credit score. In fact, you are penalized for having too many accounts with balances.
4. Thinking due dates don’t matter–as long as you’re on time. You know that missing a payment due date spells financial and credit catastrophe, but when you pay in your billing cycle could actually work in your favor, if you are in the process of applying for a mortgage or refinance. Essentially, you could make it appear to lenders that you have a zero balance on cards you use (thus, improving your utilization ratio), if you pay them off before they’re reported to the agency at the 30 day point.
5. Thinking spending on cards and paying them off equates to good credit. Establishing a positive credit history is important, but it’s only one piece of the credit score puzzle. If that spending is bumping your debt utilization ratio higher than 10%, the strategy is not actually helping your overall score, and you’d be better off paying with cash.
