You’ve done your research. You know all the factors that make up your credit score. But even the smartest folks can slip up when it comes to maximizing their credit score, sometimes without even knowing it. Here are the biggest blunders you might be making, and how to fix them:
- Paying bills late
Your payment history is the single most important piece of information on your credit report. Car payments, electricity bills, even a late library fine can get reported to the credit bureau. Mark your calendar to pay bills at the same time every month, or arrange automatic payments with your bank.
- Closing credit cards
It seems logical that canceling a credit card you’re not using would raise your credit score. But that’s not actually the case. After payment history, the most important part of your score is your debt-to-credit ratio: how much you’ve borrowed compared to how much you’re allowed to borrow. So canceling available credit can actually damage your score.
Here’s how: Let’s say you’ve got three credit cards, each with a credit limit of $5,000. You owe $5,000 on one card and nothing on the others, so you’re using 33 percent of your available credit. But close two of those accounts and suddenly you’re using 100 percent of your credit line. Such people are not considered good credit risks.
- Not checking your credit reports
Barry Paperno, consumer operations manager for Fair Isaac Corporation, recommends checking your credit reports at least once a year, and more often if you’ve had problems with identity theft, or if you’re a heavy credit user. By law you’re entitled to a free credit report from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion. If you want your actual score, you’ll have to pay about $16.
Be aware that Annual Credit Report.com is the only place where you can get a credit report for free with no strings attached. (Other sites may slip in monitoring services that will cost you a monthly fee unless you opt out.) When you get your report, make sure it is accurate.
- Taking it to the limit
Just like closing an account lowers your debt-to-available-credit ratio, running your credit cards close to the limits does as well. Officially it’s called overutilization, and it means you’re using too much of your available credit. Running up even one card can hurt your total score.
If you’ve almost maxed out your cards, use them as little as possible for a while and pay them down. Once you do, keep your charges to 30 percent or less of your available credit.
- Always using cash over credit
While that may be good for budgeting, it’s not great for your credit score. By using cash all the time, you’re not giving lenders any information to judge your creditworthiness. If you don’t want to pay interest on credit cards, pay the bill in full every month. You don’t have to use credit often – even once or twice a month is enough.
- Not shopping around for lower rates
Lenders don’t know the interest rate you’re paying, and if your finance charges are high, it’s harder for you to pay your bill. Spend some time looking and comparing credit cards and rates at Creditcards.com and Bankrate.com.
- Applying for extra cards
Getting a 10 percent discount on a purchase in exchange for opening a new credit account at the department store seems enticing, but every time you apply for a card, a “credit inquiry” is added to your report. Too many inquiries at one time make you look desperate for credit—not the signal you want to send to creditors, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. One exception: When you’re rate-shopping for a mortgage, a car loan or a student loan, your FICO score usually reflects that by lumping those multiple inquiries together as one.
We hope you enjoyed our series, “Understanding Your Credit Score.” If you have additional questions, join the conversation over at our Facebook page. Plus, you can always stop by your local CFCU branch or call us at 510-627-5000 or toll-free 800-232-8101.
(Adapted from AARP Bulletin Today by Leslie Pepper)
How Payment History Affects Your Credit Score
The History of Credit Scores
Understanding Your Credit Score
How Amounts Owed Impact Your Credit Score
Why the Length of Your Credit History Impacts Your Score
When New Credit and Inquiries Affect Your Credit Score
Using Different Types of Credit to Improve Your Score
Tips to Improve Your Credit Score
What Your Credit Score Means to Lenders