En español | Want to get a mortgage? Lease a car? Get a new credit card? You’ll need solid credit.
Anyone lending you money wants to get it back, and 90 percent of lenders use what’s called a FICO score—a number between 300 and 850—to judge your risk factor before they dole out the cash. The higher your FICO score, the more desirable a customer you are, and the lower your interest rate will be.
But even the smartest folks can slip up when it comes to maximizing their credit score, sometimes without even knowing it. Here are the biggest blunders you might be making, and how to fix them.
1. Paying bills late
Your payment history is the single most important piece of information on your credit report. “As little as one day late can hurt your score,” says Barry Paperno, consumer operations manager for Fair Isaac Corp., which originated the FICO score. Unfortunately, nearly 64 million adults don’t pay all their bills on time, according to a survey by the National Foundation for Credit Counseling, a nonprofit group. Car payments, electricity bills, even a late library fine can get reported to the credit bureau. Mark your calendar to pay bills at the same time every month, or arrange automatic payments with your bank.
2. Closing credit cards
It seems logical that canceling a credit card you’re not using would raise your credit score. But that’s not actually the case. After payment history, the most important part of your score is your debt-to-credit ratio: how much you’ve borrowed compared to how much you’re allowed to borrow. So canceling available credit can actually damage your score.
Here’s how: Let’s say you’ve got three credit cards, each with a credit limit of $5,000. You owe $5,000 on one card and nothing on the others, so you’re using 33 percent of your available credit. But close two of those accounts and suddenly you’re using 100 percent of your credit line. Such people are not considered good credit risks.
Before you close an account, Paperno suggests you ask yourself three questions:
- Am I unable to resist the temptation to spend unless I close the account?
- Am I concerned about identity theft due to having been a victim in the past?
- Am I trying to avoid an annual fee for a card I no longer use?
If the answer to any of these is yes, it may be wise to close the account, regardless of how it affects your FICO score.
If you really want to close an account or two, close the most recently opened cards (account age is important to your score) and the ones with the lowest credit limit.
3. Not checking your credit reports
Paperno recommends checking your credit reports at least once a year, and more often if you’ve had problems with identity theft, or if you’re a heavy credit user. By law you’re entitled to a free credit report from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion. If you want your actual score, you’ll have to pay about $16.
Be aware that Annual Credit Report.com is the only place where you can get a credit report for free with no strings attached. (Other sites may slip in monitoring services that will cost you a monthly fee unless you opt out.) When you get your report, make sure it is accurate, and that it’s about you and only you (for example, not about your son with the same name). If not, follow the instructions on how to fix it with the dispute form you’ll be offered on the site.
4. Taking it to the limit
Just like closing an account lowers your debt-to-available-credit ratio, running your credit cards close to the limits does as well. “The score looks at your accounts individually and as a whole,” says Paperno. Officially it’s called overutilization, and it means you’re using too much of your available credit. So running up even one card can hurt your total score.
If you’ve almost maxed out your cards, use them as little as possible for a while and pay them down. Once you do, keep your charges to 30 percent or less of your available credit, recommends Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling.
Which should you pay off first, the card with the highest interest rate or the card with highest balance?
That depends on what your goal is. If you want to get your credit score higher, then you should pay off the one with the highest balance, because that high balance is lowering your ratio of debt to available credit. But if you want to save money in the long run, paying off the one with the higher interest rate is probably better, even if it has less effect on your credit rating.
5. Using cash over credit
While that may be good for budgeting, it’s murder on your credit score. “Your credit rating is not solely a function of what you owe, it’s a measure of how well you handle debt,” says Scott Bilker, founder of DebtSmart.com. By using cash all the time, you’re not giving lenders any information to judge your creditworthiness. If you don’t want to pay interest on credit cards, just pay the bill in full every month.
6. Not shopping around for lower rates
Lenders don’t know the interest rate you’re paying, and if your finance charges are high, it’s harder for you to pay your bill. “This puts a lot of financial pressure on people, which can eventually cause them to be late or even default,” says Bilker. Spend some time looking at cards and rates at Creditcards.com and Bankrate.com.
7. Applying for extra cards
Getting a 10 percent discount on a purchase in exchange for opening a new credit account at the department store seems enticing, but every time you apply for a card, a “credit inquiry” is added to your report. Too many inquiries at one time make you look desperate for credit—not the signal you want to send to creditors, says Cunningham. One exception: When you’re rate-shopping for a mortgage, a car loan or a student loan, your FICO score usually reflects that by lumping those multiple inquiries together as one.
Leslie Pepper is a freelance writer based in Merrick, N.Y. Her work has appeared in Parade, Good Housekeeping, Woman’s Day and Harper’s Bazaar.