4 Responsible Choices That Can Hurt Your Credit Score
Your credit score affects you more than you know. Employers look at credit scores. Landlords look at credit scores. Bill providers look at credit scores, and you may pay more if your score is too low. With all this pressure, if you haven’t already started working on some good habits for improving your credit score, now is the time to start.
However, it might surprise you that some actions you can take in an attempt to improve your credit score can actually hurt it. If your credit score isn’t where you want it to be, it might be due to one of these habits or choices:
Settling an old debt can seem like an easy way to get out of a sticky situation. You make an agreement with a third party, pay a part of your debt and the owner writes off the rest.
However, unless it’s at least 90 days since the debt was due, it’s always better for your credit score to pay the debt back in full yourself. Settling a debt for less than you owe can take your credit score down as much as 100 points. This happens because the debtor only took your settlement on the assumption they’d never see the full amount you owed. Future lenders worry they’ll end up in the same situation, and that makes them hesitant to lend.
Turning down credit
It might seem like a good idea to reject a higher credit limit. If your credit card offers to boost your limit, that may indicate you have more money to spend. If you’ve struggled with responsible credit management in the past, you might want to turn it down in an effort to keep your spending in check.
While keeping your credit limit low can help with learning to budget, a higher credit limit does come with benefits. A higher credit limit can boost your score through something called a credit utilization ratio. This is the ratio of your credit card balance to your credit card limit. The less you spend relative to what your limit is, the higher your score in terms of this factor. If you have a higher credit limit, you’ll be using less of it, therefore increasing your score. Just be careful!
Avoiding credit cards
Many people might think it is more frugal to not have a credit card at all. It seems to simplify your finances at first, but it complicates your relationship with credit in the future. While credit may not be necessary for day-to-day expenses like groceries or gas, you’ll likely need it for a home loan, auto loans and to prove to potential landlords and employers that you can be trusted. So long as you’re paying everything on time and not carrying a high balance, a credit card is much more beneficial in the long run.
Closing paid accounts
Paying off a credit card is often a struggle. Once it’s over, your instinct might lead you to throw it away and close the account, but since 15 percent of your credit score is the length of your credit history, you want to keep your accounts open for as long as possible.
Additionally, your credit utilization score is worth 30 percent of your total score. Closing a credit card account kills available credit, which lowers that balance-to-limit ratio. You can destroy the card itself and delete its record from online shopping sites to be certain you’ll never accidentally use it, but don’t cancel it. Even after all that, you should keep the account open (provided there’s no annual fee attached to it), just to keep your score up.
Improving or managing your credit score is not easy. You must be in charge and be responsible enough to pay everything on time. This is where the Frenchtown Financial Opportunity Center can help. Stop by today to get help with budgeting, credit management or debt consolidation.
*The content provided in this article consists of the opinions and ideas of the Frenchtown Financial Opportunity Center, does not constitute legal or financial advice, and should be used for informational purposes only. Any decisions you make based on the information contained in this article is made in your sole discretion and liability. The Frenchtown Financial Opportunity Center disclaims any damages or liability for decisions you make based on the information provided.