From trying to rent an apartment to getting a cellphone contract, your credit score matters. Lenders and third parties use your credit score to help determine whether you’re a risky borrower and whether or not to approve you for you apartment application or phone contract. Your credit score is a major component of your overall financial health and your credit card habits are significant contributors to your score.
If you want to improve your credit – or maintain the score you have now – make sure to avoid the following six credit card mistakes.
Even if you pay off your credit card bills in full monthly, your spending habits could still be hurting your score. This is due to the debt-to-credit ratio – how much debt you’ve accumulated on credit cards divided by the credit limit on the sum of your accounts – which makes up 30% of your credit score. If you want to get a good credit score, you need to keep your debt-to-credit ratio relatively low. Shoot to keep your balance to no more than 10% of your credit limits.
Payment history is responsible for 35% of your credit score, which means that even missing just one payment on your credit card can substantially hurt your score. Luckily, there are ways you can help prevent late payment. The easiest option is to set up automatic bill pay by linking your credit card to a checking account. You can also set up text message or email alerts to remind you when a payment is due. If you’re still paying by mail, allow plenty of time for the bill to get there. Problems with mail delivery are not an acceptable excuse to an issuer for your late payment.
You are entitled to a free copy of your credit report from each of the three major credit bureaus – Equifax, Experian and TransUnion – every 12 months. It is possible for errors to appear on your credit report for reasons beyond your control, such as someone sharing your name and the bureaus mixing up the accounts, so you need to vet each report.
In fact, based on a 2013 Federal Trade Commission survey, one in four Americans has found errors on their credit reports. Because it can take time to get errors on your report removed, you want to be proactive and contact the credit bureau immediately if you spot an issue. Remember that your credit report only includes your credit history and not your numerical score. You can use myFICO.com’s free score estimator for a rough idea of your numerical score.
Each time that you apply for a credit card, you stimulate a “hard inquiry” on your credit report, which can ding your credit score by up to five points. Although a slight blemish may not seem like a big deal, opening multiple cards in rapid succession can have a significant negative impact on your score. Additionally, every time that you open a new credit card, you shorten the average age of your credit accounts, which can hurt your length of credit history (which makes up 15% of your score).
When you close an account, you reduce the average age of your account and lower your available credit limit, both of which result in a blow to your credit score. Make sure that you charge a least one purchase to each credit card at least one per quarter. If you fail to do so, the credit card company may perceive the account as inactive and close it without giving you advance notice.
This credit card tip won’t boost your credit score but it will save you money. Carrying a balance from month to month could mean that you’re wiping out any points or cash back that you earn, even on rewards cards. Carrying a balance doesn’t seem like a big deal when the debt is small, but compound interest on the balance can make your debt go from small to huge before your know what’s happening. Credit cards are a tool to help build credit. They should not be used as a substitute for a personal loan.
Your credit score is important for so many big things in your life – from getting a house or car to buying a cellphone – so you need to make sure you monitor it. It’s easy to credit card mistakes, but recovering them is anything but. Use the above tips and avoid these six credit card mistakes for a healthy credit score.