Credit scores are something all adults rely on but few fully understand. Years ago it was a mystery what exactly comprised your credit score. The veil has lifted and we now know the 5 components of a credit score: payment history, credit utilization, length of credit, new credit and mix of credit.
Many people assume that so long as they use their cards and pay off their balance right away, they will have good credit. This is not necessarily true. As you can see, payment history is only one component of a credit score. There are many little things individuals do frequently that may negatively affect a credit score.
If you are hoping to improve or simply better understand your score, read on for the 4 things you don’t know may be affecting your score.
Using Your Credit Card Too Much (Or Not Enough)
Most people know that using and paying off credit cards has a positive influence on credit. While this is true, there are a few details that go a step further. While it’s good to use your card, using it too much is a bad thing. Using more than a third of your available credit on a particular card can actually hurt your score since it suggests your spending might outpace your income.
After payment history, your credit utilization ratio is the second most important factor in determining your score. Try and keep this rate at about 15%. In other words, if you have a combined credit limit of $10,000 across all your cards, keep your balance hovering around $1,500 or less.
However, not using your card enough isn’t good either. Making a few small purchases here and there isn’t a good strategy because it ells your credit card company that you don’t have enough income to make bigger purchases and thus are a liability to them. Spending too much or too little can cause your credit limit to drop and harm your score.
According to this survey by Credit Karma, consumers with a 0% credit utilization rate had much lower credit scores than those with a 1-10% rate.
Old Credit Cards
History is an important part of your credit score. If you have had a card for ten years and have a history of paying it off on time each month, your credit score will reflect this. But what if you don’t use the card anymore? Should you cut it up and cancel it altogether? Not so fast. Many people don’t know that closing a card with satisfactory use will wipe that record from your history.
The average age of your credit history is a factor in determining your score. If you close your old credit card and open a new account, this will harm your credit score.
Young people are encouraged to get a credit card early and keep it open and in good standing. Your first card will help you when a lender looks at the length of your credit history.
Your Lack Of Borrowing
You might have thought that staying away from borrowing any money was good for your credit score, but it’s just not true. Although it seems counterintuitive, loans can actually help your score. By shouldering a monthly payment, your credit providers can see that you have the income, financial stability and responsibility to pay off your liabilities in a timely manner.
If your credit file is thin, you need to show the loan officer that you are trustworthy. There’s no better way of showing that than by having installment loans such as a car loan or a mortgage on your record. Just having a few credit cards isn’t enough, it’s important to have a mixture of both revolving and installment credit lines.
Applying For Too Much Credit
Frequent credit checks can actually hurt your score (they’re called hard inquiries). If you are shopping for a car loan, a mortgage or student loans, multiple inquiries in a short amount of time will only count as one. However, if you apply for a loan from a bank, then open a new credit card a month later, followed by a car loan request, it will throw up red flags and hurt your score.
Applying for multiple credit lines makes it appear that you are in need of money and thus you are deemed a higher credit risk. Ideally you’ll want to keep your hard inquiries at one or two per year.
Most Americans understand that using a credit card and paying off the balance on time is beneficial for a good credit score, but there are many other small mistakes you can make that can damage your credit score. If you are planning to apply for a major loan like a mortgage in the near future, keep this tips in mind to keep your credit score from suffering, your finances will thank you.