Sometimes you start out to do the right thing – save some money or simplify your life – but many of the options you choose can also result in lowering your credit score. And this may mean paying a higher interest rate or getting less favorable terms if you want to make a big purchase such as a home or a car in the near future. So be on the lookout and be aware that the following behaviors could have negative consequences:
- Applying for more credit. While it may sound frugal to open a department store credit card and receive an instant discount on your purchase, it often does not help you in the long run because the savings may not be worth the ding to your credit score. Any new credit applications are a hard inquiry on your credit report, which can lower your score. And the same is true for gas cards, new auto insurance, and cell phone plans where they check your credit. All of these could result in savings but they could also ding your credit score so weigh the pros and cons.
- Keeping a zero balance. Because we are at the mercy of the credit bureaus, many of the rules they have to build and maintain a high credit score are really counterintuitive to staying totally debt free and this is one of those instances. When a small amount is owed, the remaining credit on your card is factored into your credit utilization ratios (how much of your available credit you are using) while cards with no balance don’t count. So you can actually boost your score by having a small amount of debt while having none may lower it.
- Closing a credit card account. Everyone is trying to get out of debt these days so once you get there give yourself a big pat on the back but resist the urge to cut up your card and close your account, especially if is one of your oldest cards. One of the factors that the credit bureaus look at to determine your credit score is the length of your credit history and closing an older account could result in another ding to your credit score
- Keeping a high balance. While tough economic times may result in higher credit usage be aware that the amount you owe on your accounts makes up about 30% of your credit score. When you use only a small amount of the total credit you have available, such as 10% – 30%, lenders consider you to be a low credit risk and are more willing to lend to you and give you more favorable terms so always keep your totals as low as possible, but not zero (see #2 above).
- Negotiating a lower APR. Who wouldn’t like to lower their rate, however this sometimes results in the credit card company also lowering your credit limit. While on the surface this may not seem like a bad thing, what this does is it reduces the total amount of credit you have available and if you are using more than 30% of your available credit this could ding your credit score (see #4 above).