When it comes to credit, I learned the hard way. And the very personal way. Many years back, I thought I’d take a shot at upping my credit score. I was fresh out of college, didn’t have much in way of established credit, but of course, thought I knew it all.
The best way to learn something, in my opinion, is through experience. The second best? Through someone else’s experience. Learn from my mistakes…
What NOT to Do to Improve Your Credit Score and Overall Credit Know-How:
1. Close credit card accounts that you no longer use.
I got a great offer for a credit card and immediately thought, “Now that I have this low, low interest rate and fantastic terms, I might as well close my other card since I probably won’t use it again.” Right? Wrong.
Part of your credit score is how much credit you use (total balances) compared to how much credit is available to you (total of all credit limits). The less you use and the more you have available, the better. By closing accounts, you’re making the amount of credit available to you smaller, which can make the proportion of credit-used-to-credit-available higher – and that can take a toll on your score. And it did… on mine.
2. Take advantage of every discount that’s offered by opening store credit cards.
I know the drill. You went a tad overboard on your latest shopping trip. When you hit the register, that 10 percent off your first purchase by opening a store card offer sounds mighty enticing. And why not? It’s just one more card.
Okay, here’s the deal: There’s nothing inherently wrong with retail store credit cards. True, their interest rates are usually pretty high and the amount of credit granted to you may be far less than your Visa or MasterCard, but they’re just credit cards. Taking advantage of the first purchase deal is okay once or twice, but don’t make a habit of it.
Opening too many store cards in a short period of time may indicate to the credit card “Gods” that you’re overextending yourself and could potentially have a negative effect on your credit score. Also, remember those high interest rates I mentioned? They could wreak havoc on your wallet unless you plan to pay off your balance in full each month. If you’re charging more than you can afford, you might be paying off that debt for a lot longer than that sweater you bought is stylish.
3. Always pay down the cards with the highest interest rates.
So you have a bunch of credit cards – sprinkle on top a couple of student loans – and you’re wondering, where do I start? First and foremost, ALWAYS pay your credit card and loan minimum payments ON TIME, EVERY MONTH. This is the amount that you’re required to pay – for credit cards, it’s usually between two and four percent of your balance. If you don’t pay your minimum payments, your interest rate will go up, you may be charged fees and your credit score will suffer.
That said, what card or loan should you pay down first? If you have a little extra cash and decide you want out of the debt game, AND you’re making sure to pay ALL of your minimum payments on time every month, the smartest financial strategy is to put that extra dough toward the card or loan with the highest interest rate. When you’ve gotten that taken care of, go after the next highest rate card or loan. This strategy won’t necessarily impact your credit score, but you’ll save money in interest and your overall debt balance will decrease faster.
However, if you’re more concerned about your credit score than how much you’ll pay in interest, you may want to concentrate on paying down the debts with the highest balances first. As previously mentioned, part of your credit score is how much credit you use compared to how much credit is available to you. If you’re using more than 50 percent of your available credit on any one card, or overall, your credit score is taking a hit. You can help your score rebound by paying down high balances so they’re well below 50 percent of your credit limit.
4. Why pay it down when you can move it around?
When I started getting a ton of credit card offers in the mail, I was frequently tempted to take the balance on my credit card, which I was paying interest on, and transfer it to a new card to get the zero percent interest for six months promotion (or whatever the seemingly sweet deal was at the time). The problem with transferring balances I found was that I became so concerned with how much interest I might save in those six “teaser” months that I often ignored the fine print. And by fine print, I mean the transfer fee.
Transfer fees vary, but if you don’t take the time to calculate your total real savings, you might end up paying more up-front for that transfer fee than you would have in interest if you had just stuck it out with your current credit card. Of course, it depends on your current rate and balance, the new credit card offer and the transfer fee, but beware! On more than one occasion, I was swept off my feet by supposedly great offers, only to kick myself with those same feet when I later realized that it actually cost me more in the long-run to transfer my balance.
Another note: While transferring balances doesn’t necessarily affect your credit score, opening a new account can. Typically, you’re okay if you’re not overextending yourself and don’t open a bunch of new accounts in a short period of time. Ultimately though, the goal is to rid yourself of debt and to pay off your entire balance in full every month. The closer you get to this goal, the higher your score will go.
5. Ignore your credit report. It’s just a bunch of financial gobbledygook.
You never know what may lurk on your credit report. There may be mistakes that are affecting your score. Sometimes accounts that aren’t yours are erroneously added to your report. Other times, credit limits might be reported as lower than they actually are. Still other times, accounts may be listed as late when they’re current. It’s a smart move to get a copy of your credit report regularly and go over it with a fine-tooth comb.
Some things on your credit report that you don’t have to worry about, as they have no affect on your score, are outdated addresses or old employment information. Things you should take a look at, however, include:
- Each account. Is it yours? Is the balance and credit limit accurate (or close – sometimes there’s up to a 30-day lag time in reporting)? Are there any late or derogatory payments listed? If so, are they accurate?
- Closed accounts. Are these accounts supposed to be closed? If not, you may want to contact the creditor, as you could be losing out on that available credit (see tip #1).
- Hard inquiries. Hard inquiries – anytime your credit report is pulled for the purpose of extending you credit or a loan offer – can hurt your credit score. In contrast, soft inquiries – when you pull your own credit for educational purposes – will not affect your score. Take a look at your report and make sure you don’t have too many hard inquiries. If you do, did you make these credit requests? Did you recently apply for credit or a loan?
Learning how to best manage your credit takes time. And in some cases, a few mistakes. Don’t beat yourself up if you don’t always do it right. Credit scores aren’t always the most logical beasts and luckily, you can take measures to increase your score and rebound from your mistakes.