By Colin Nass, CFP®AEP®RICP®
Your credit score is one of your most important assets.
It should be treated with care as it impacts your overall financial health. Your credit score influences how much you will spend on interest and fees. A very good credit rating will likely get you the best rates and terms on loans and credit cards. A lower score will likely cost you money with higher rates and may even prevent you from getting financing.
Too often people are unaware of actions that could unintentionally hurt their credit score.
You may be sabotaging your credit score if any of the following apply:
Not paying attention to your credit balances. A good credit score isn’t just about paying your bills on time. Approximately 30 percentage of your credit score is based on how much you owe or how much you owe, which includes the use of your credit. According to Experian, credit usage is the amount of revolving credit you are currently using divided by the total amount of revolving credit you have. In other words, it’s the amount you currently owe divided by your credit limit.
A low rate of credit utilization — lower 30 % — shows that you are using less of your available credit. Credit scoring models generally interpret this as an indication that you are doing a good job managing credit by not overspending; Controlling your spending can help boost your credit score.
As your credit usage increases, you might start to see your credit score drop, as this could be an indicator to lenders that you’re having trouble managing your finances.
Closing of accounts. Most of us close credit cards when we pay them off thinking it’s the right decision. However, this can have a negative impact on your credit score. A fully paid credit card or line of credit has a positive effect, even if you stop using the account. But if you close the account, your overall credit usage increases and your credit score can potentially decrease.
Loan co-signing. It may seem like a good way to help a family member or close friend get a loan. But most of us don’t realize the loan shows up on your credit report until it’s paid off in full. And, if the borrower makes late payments (or even worse, defaults on the loan), it will affect your credit score.
Asking too many credit cards. If you have good credit, you’re likely getting plenty of pre-approved credit card offers with better rates and terms than the card you currently have. Don’t be tempted to apply for all. This could hurt your credit score. Credit inquiries represent about 10% of your credit score. Although not a big factor, you should think about the impact before taking advantage of this upcoming pre-approval.
Not monitoring your credit scores. One of the best ways to tell if you’re sabotaging your credit score is to monitor it. Credit scores can change as frequently as a month, but you won’t know it unless you monitor yours regularly.
If you notice a significant drop in your credit score, it could indicate that your credit utilization is getting too high, that you are unsuspectedly behind payment, or at worst you could be a victim of identity theft. But you wouldn’t know any of this if you didn’t monitor your credit score regularly.
Fortunately, there are several ways to get and monitor your credit score for free. Annualcreditreport.com offers consumers a free copy of your credit report every 12 months from each credit bureau: Equifax®Experian® and Trans Union®. Federal law allows free credit reports, so don’t be fooled by websites that want to charge a fee.
Transfer of balances. Consolidate your credit card balances on one card with 0The interest rate can help you save money and pay off your debt faster if you pay it off on time. However, if you transfer balances to a new card each year, you will not only lower your credit score, but your credit usage will also increase if you are still using the old credit card.
Additionally, most balance transfer offers come with a transfer fee. 3 percent or 5 percent1 to process transactions.
Avoid credit card use. Although it seems counter-intuitive, avoiding credit card use can hurt your credit score because you won’t have a credit history or the right combination of credit when you want to get a car or home loan.
According to myFICO.com, “FICO® Scores consider the combination of credit cards, retail accounts, installment loans, finance company accounts, and mortgages” up to 10% of your score.
You control your credit score and its evolution. Follow these tips to help your credit score stay stable:
• Pay your bills on time or at the beginning of each month.
• Keep your debt to a minimum.
• Don’t open or close too many credit cards.
Remember that simple mistakes can hurt your credit score and impact your overall financial health.
Colin Nass, CFP®AEP®RICP® is director of financial planning at MMBB Financial Services. He uses his more than 20 years of financial planning and investment experience to help members achieve their financial goals.