Your credit score plays a role in just about every part of your financial life. If you are applying for a mortgage, a bad credit score could cause you to be turned down by lenders. Meanwhile, a superior credit score can qualify you for the lowest interest rates. When it comes time to buy a car, your credit score will determine how much you have to pay on the auto loan.
Keeping tabs on your credit score is necessary, and it is a good idea to check your score at least once a year. It is also important to know which factors help determine your credit score. If you do not understand how your score is composed, you could inadvertently take actions that will lower your rating.
#1 – Applying for a Bunch of New Cards
Every time you apply for a new credit card, the issuer pulls a copy of your credit report for review. All of those credit inquiries can hurt your credit score, so it makes sense to limit your applications to a few times per year.
If you find a credit card offer that is simply too good to resist — perhaps one with a generous cash bonus or the promise of a free flight — be sure to check your credit report and credit score before you apply. If you already have an excellent credit score, a single inquiry should not affect that number very much. If your credit score is hovering on the brink, you might want to pass on that offer and work on rebuilding your credit instead.
#2 – Going on a Shopping Spree with Those New Cards
One of the primary factors in determining your credit score is the amount of credit you are using relative to the amount you have available. If you just love using those new credit cards, you could be damaging your credit score with every purchase.
If the new card accounts you just opened give you a combined total credit limit of $20,000 and your spending spree gave you a combined balance of $10,000, you have a 50% credit usage. A rule is to keep your credit utilization below 30%. So for a total credit limit of $20,000, you will want to keep your total balance (amount spent) below $6,000 to prevent harming your score.
#3 – Taking Advantage of Deferred Payments
Many home improvement stores and furniture sellers offer special deals that allow customers to defer the payments on the purchases they make. Depending on the deal, customers might not have to start paying for their home appliances or living room sets for six months to a year or more.
While those offers can be a great way to furnish your home and get the things you need, they could potentially hurt your credit score. If the total you charged for those deferred payment purchases is close to the limit on the card, that high debt to available credit ratio could hurt your score.
#4 – Closing an Account with a Zero Balance
You might think that reducing the number of credit cards in your wallet would improve your credit score, but the opposite is more accurate. If you close a bunch of cards with zero balances, your credit score could suffer.
That is because your credit score derives in part from the amount of credit you have available and the amount you have used. Closing zero balance cards will reduce the amount of total credit you have available and throws off your credit utilization ratio. It is a good idea to keep those old accounts open and not use the cards.