You may know of some common mistakes that can lower any credit score: paying bills late, forgetting to pay bills, home foreclosure, bankruptcy, and repossession. Did you know there are actions that many believe to be good for their credit, but they actually have a negative effect? Let’s take a closer look at some of the less familiar risks:
Closing old credit cards.
When we’re shoring up our finances, we often think cutting up old credit cards and closing our accounts is good for our credit. If cutting up cards will curb spending, then by all means, grab the scissors…but don’t close your accounts. The average age of credit lines is a factor in determining your credit score. The further back your history goes, the more likely lenders are to view your records favorably. Lenders like to see reliable payments over a long period of time. If you close your accounts you’ll lock lenders out of valuable insights that could have improved your chance for approval.
Closing cards without balances.
When you’re looking for a fresh start, it’s common to close credit cards that have already been paid off. After all, you’re not using them. Why keep them lying around? Available credit, that’s why. Available credit is the total amount of credit you have, compared to the amount you’re using at any given time. From the lender’s perspective, if your available credit is high, but the amount you use is low, it proves you’re trustworthy and responsible. That’s what lenders are looking for when they consider your credit history. Pay off your balance, but don’t close your cards.
Having only installment loans, with no credit cards.
You may have been told to use credit cards only when necessary, or to charge sparingly when using them. Generally, many people believe that installment loans for larger purchases – major appliances, home loans, auto loans – are necessary, and therefore warranted. Often, people tend to focus on those, and forego credit in an effort to be responsible. It’s important to realize the type of accounts you keep. A combination of credit card accounts and installment loans contributes to higher scores.
Applying for credit that offers the best terms.
When you need credit, it’s important to choose the one with the best terms, isn’t it? Unfortunately, applying for credit results in something called “hard inquires,” which can show up on your credit report and determine if you qualify for a loan. Having multiple hard inquiries indicates that you really need credit and that you may even be desperate. While shopping for the lowest rate may seem wise, if you’re looking to increase or repair your credit score, it’s best to use restraint when actually applying for credit.
Limiting credit accounts.
Wouldn’t it seem logical that not needing credit – and living within our means would make us more attractive to lenders? Contrary to logic, a greater number of accounts actually increases your credit score. Consumers with more accounts generally score higher ratings, because it shows that many lenders have approved your credit history. This doesn’t mean you should run out and open a number of new credit card accounts – it’s still recommended that you use credit judiciously. However, keeping a small number of accounts, with varied types of credit, will contribute to your long-term credit rating over time.
It’s important to understand the difference between managing your use of credit and managing your credit score. Lenders rate your ability to pay off loans based on your history and current information. If you’ve made some of these common mistakes, you’re not alone. Reach out to us at Perfect Credit Consulting, LLC. Conveniently located in Norwalk, CT, we help clients from Fairfield County and Westchester County repair their credit, save money, and improve quality of life. Contact us at 203-291-9465 or firstname.lastname@example.org. Your well-being is our number one priority.