A strong credit history is the best indicator of our personal financial health. With excellent credit, we can qualify for the best rates on home and car loans, while bad credit can raise our insurance costs and make it difficult to pass a pre-employment background check.
Yet the one thing holding back your credit score may be your credit cards themselves. Here are five things that you can do with your credit cards that can actually hurt your credit:
1. Make late payments. Your friends may forgive you if you pay them back a little late, but your bank will not. In addition to imposing late fees and penalty interest rates, your bank will report your delinquency to the credit agencies, and bring down your score.
2. Opening too many new credit card accounts. Banks are constantly tempting us to apply for new credit cards by offering sign-up bonuses, promotional financing rates, or both. And while applying for one or two new credit cards will have a minimal impact on your score, don’t take it too far.
Barry Paperno, Credit.com’s expert on credit scoring, says “Opening new accounts (of any type) can knock a few points off your score when they appear on your credit report, as might any additional credit card inquiries from approved or declined applications for credit. ”
[Related Article: Can You Really Get Your Credit Score for Free?]
3. Max out your line of credit. One of the components of a credit score is a consumer’s credit utilization. This is the ratio of the amount of debt to the total amount of credit extended. Credit utilization is one of the most important factors in a score. To maximize your score, it’s ideal to use as little of your available credit as possible — 10% or lower if you can.
It’s important to note that even if cardholders max out their credit but pay their balance in full at the end of the month, the balance reported in their credit reports won’t be updated until the credit card issuer drops the next statement and reports an update to the credit bureaus — which usually happens once a month. Therefore, those who utilize the majority of their credit limit will see their credit scores drop by a small, but significant amount because their credit score is based on the balance in the most recent credit card statement.
4. Get stranded with your ex’s debt. Many couples manage their finances jointly and share credit card accounts. And while this can work great when they are together, it can have disastrous consequences if they split up. If your ex is a joint account holder or even an authorized user on your account, you will be responsible for payment of his or her purchases. Failure to pay the bill will do serious damage to all joint account holders.
5. Quitting cold turkey. When credit card use appears to be a minefield, some cardholders may be tempted to just cancel all their accounts. But in fact, closing all of your accounts can also hurt your score. Canceling all of your cards will reduce the amount of credit you are extended while reducing your average credit history, and both of these factors will lower your score.
Credit cards can be a secure and convenient method of payment, but be careful. By avoiding these credit card mistakes, you can continue to enjoy the benefits of the good credit history you worked hard to earn.
[Credit Score Tool: Get your free credit score and report card from Credit.com]
Image: Ron Chapple Studios