Establishing a healthy credit history is a responsible action of mature adult and very important to ensure a financially bright future. With the escalating costs of goods and services, it is critical you work towards this goal. In a previous blog, I wrote about five actions that help your credit score, but what about behaviors that hurt your credit score? Ask yourself if any of the following five situations pertain to you.
1. Missing a Creditor Payment
This may sound like a no brainer, but missing a credit card payment could be detrimental to both your current and future credit. Missing just one payment can make your credit score drop. If you make a habit of missing payments because you don’t see an immediate effect, think again. While you’re feeling comfortable, your credit score is plummeting, making it more challenging for you to obtain credit in the future. To add salt to the wound, delaying or missing payments will typically result in a late payment penalty, making it more challenging for you to obtain credit in the future.
2. Closing Old Credit Card Accounts
You have paid off your credit card; congratulations! Some people who are tired of debt immediately choose to close a credit card they have just paid off. You might want to think twice before you close out those old accounts as about 30% of your credit score is based on the amount of debt you have charged. The lower the amount of credit card debt you carry, the better it is for your credit rating due to your “credit utilization rate.” By closing old credit card accounts, you could throw off your credit utilization rate and unintentionally lower your credit score.
3. Accepting Too Many Retail Incentive Card Offers
I know it can be tempting to say yes to the smiling sales associate at your favorite retail store who offers you a 15% discount for opening a credit card, but just say no. Retail credit cards carry much higher interest rates than national brand cards, and applying for that new credit card triggers a hard inquiry on your credit report. Each inquiry of credit may cause a “ding” on your credit score. These inquiries add up fast, and may have a detrimental impact on your credit score.
4. Opening Too Many New Credit Card Accounts
If you open too many new accounts in a short period of time, you may be risking your credit score. Each time your credit is “run” by a creditor to determine your eligibility, your credit score takes a hit. Hard inquiries, as mentioned above, can deduct about 5 points from your score. A familiar example of this happening is someone who purchases a house and opens multiple credit cards at the same time to buy furnishings and other items for their new home. Restrain yourself and buy a little at a time.
5. Shopping Too Long for a Loan
When shopping for a large loan, like a home mortgage, it is important to shop around for a low interest rate. In fact, interest rates can change daily, and could be much lower a month from your first credit inquiry. However, shopping too long for a loan could actually hurt your credit score. Although mortgages and auto loan inquiries will appear on your credit report, they will only count once as long as they are done within a short period of time, typically within 45 days. So, when you make the decision to shop, make sure you’re ready.
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