Q&A:
Good
Ideas, Bad For Credit: How Your Responsible Choices Can End Up Hurting Your
Credit Score
Q:
I've had some trouble with credit in the past, but I'm trying to turn over a
new leaf. I think I'm doing everything right, but my credit score still isn't
rising! What gives?
A:
Credit scores can affect you more than you know. Employers look at credit
scores. Landlords look at credit scores. Bill providers look at credit scores,
and they might decide to charge you if yours gets too low. With all this
pressure, you've no doubt started working on some good habits for improving
your credit score. You pay your bills on time, are sure to not max out your
credit line and work hard not to default on a loan. You might be surprised to
find out that some actions you take to improve your credit score are actually
hurting it.
If
your credit score isn't where you want it to be, it might be due to one of
these habits. Read on for four good ideas that might actually be hurting your
credit score:
1.)
Debt settlement
Settling
your old debt can seem like an easy way to get out of a sticky situation. You
make an agreement with a third party, pay a part of your debt and the owner
writes off the rest of it.
However,
unless it's at least 90 days since the debt was due, it's always better for
your credit score to pay the debt back in full yourself. Settling a debt for
less than you owe can take your credit score down as much as a hundred points.
This happens because the debtor only took your settlement on the assumption they'd
never see the full amount you owed. Future lenders worry that they'll end up in
the same situation, and that makes them hesitant to lend.
2.)
Turning down credit
It
might seem like a good idea to reject a higher credit limit. If your credit
card offers to boost your limit, that might seem to indicate you have more
money to spend. If you've struggled with responsible credit management in the
past, you might want to turn it down in an effort to keep your spending in
check. Keeping your credit limit low can give you a budget and a sense of
security regarding when you'll stop yourself from spending.
However,
a higher credit limit does come with benefits. To be exact, it can boost your
score quite a lot through a something called a credit utilization ratio. That's
the ratio of your credit card balance to your credit card limit. The less you
spend relative to what your limit is, the higher your score in terms of this
one factor. That means, if you have a higher credit limit, you'll be using less
of it, and therefore increasing your score.
3.)
Avoiding credit cards
With
all this rigmarole and paperwork, many people might think it's easier to just
not have a credit card at all. While it might make your life simpler at first,
it can complicate your relationship with credit in the future. You might not
need credit for day-to-day things like buying groceries or gas, but you will
need it for a home loan, auto loans and to prove to potential landlords and
employers that you can be trusted. So long as you're paying everything on time
and not carrying a high balance, a credit card is much more beneficial in the
long run.
4.)
Closing paid accounts
Paying
off a credit card can be a big struggle. Once it's over, your instinct might
lead you to throw it away, burn it or otherwise have it completely out of your
life once and for all. Credit reporting agencies say something different,
though. Since 15% of your credit score is the length of your credit history,
you want to keep your cards for as long as possible.
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