Good Money Habits That Can Hurt Your Credit History

Credit works in mysterious, sometimes contradictory ways. If you have good financial habits and are managing your money well, you might think your credit score will be in good shape. However, this does not always work – and sometimes smart financial moves are not the best way to lend.

Don’t use credit cards at all

According to Experian , the average credit card balance per person in the United States was $ 6,194. You might think that giving up credit cards is a smart financial move, as high interest rates make them look like a debt trap . And you’re right to think they are risky – they can be.

However, credit cards are very convenient and increasingly inseparable from our daily life, whether we use them to rent a car, shop online, open a bar tab, or use them for emergency expenses. They are also critical to building credit: if you don’t have a credit history, it’s hard to get a loan, credit card, or mortgage. Moreover, account providers are legally allowed to charge more from customers with “risky” credit. If you have no credit at all, they may find you risky.

The trick is to create loans responsibly. Obviously, you could open a regular credit card and just have no balance in your account, but if you’re afraid of the temptation, there are several other options:

• Get a secured credit card
• Sign up for a low limit card
• Become an authorized user on someone else’s card

With these options, you can safely plunge into the credit pool without worrying about drowning in the depths.

Waiver of a higher credit limit

If you are wary of debt, your internal reaction to a credit card company offering a high credit limit may be to refuse it altogether. This is a healthy answer – after all, you don’t want to tempt yourself and use credit unnecessarily.

While this may sound reasonable, a low credit limit actually prevents you from establishing a higher credit rating through what is known as leveraging credit. In short, credit utilization is the amount of credit you actually use compared to the amount of credit available to you. If your credit limit is, for example, $ 10,000 and you have $ 1,000 in arrears, the loan utilization rate is 10%. The lower this ratio, the higher your score.

Of course, you can keep this ratio low by using very little debt. However, another way to increase it is to set a higher limit. If your credit card company raises your limit to $ 20,000, your ratio will suddenly drop to 5% and, in theory, your account will go up. In fact, here’s a breakdown of how your ratio affects your credit score, according to Credit Karma .

Please note that your result using 1% is better than not using credit at all. This is because lenders want to see that you can handle charging the fees and paying them off without overspending.

You can request a higher limit from your credit card company, but one important caveat to keep in mind is that sometimes requests result in a hard request or a hard check on your credit . This can lower your score by six months or so, but at least it’s temporary. As a result, you will want to be strategic in your credit limit requests and avoid the hassle of applying for a new loan or mortgage.

Closing the old card

Let’s say you just paid your last credit card and officially paid off your debts. The next step is to cancel them, right? Not necessary, as it can lower your credit score. This is because 15% of your score depends on the length of your credit history. According to the FICO, this includes:

• How long have your credit accounts been created, including the age of the oldest account, the age of your new account, and the average age of all your accounts.
• How long have specific credit accounts been opened
• How long has it been since you used certain accounts

And this is not just a story. The use of the loan is 30% of your estimate. By closing your account, you decrease the available credit, which means that the utilization rate increases. As a result, your score is likely to drop. However, this fall should be minimal and short-lived if you have good creditworthiness from the start.

One way to keep your credit limit high is to keep your unused credit card open and monitor it periodically to ensure that your balance is always zero. Depending on the card, you can also set up a balance alert to receive automatic notifications about card transactions. As a precaution, you can even destroy the physical card.

Paying off old debts

When people want to fix their financial problems, they sometimes turn to paying off debt , which seems reasonable enough at first, as your debts can be paid off for much less than you owe. There are many disadvantages to paying off debt, however, and it is generally not recommended except perhaps as a last resort . It also lowers your credit score. When you pay off a debt, your lender agrees to take less than you really owe. This is viewed as a risk by other lenders, and bad news for your credit rating: Under the Fair Credit Reporting Act (FCRA), the repaid debt remains on your credit report seven years from the date it was paid off.

Learn more about your credit score

Contrary to the opinion of many, there is no single credit rating. Companies use different scores to assess your creditworthiness, but the most common is your overall FICO score, which serves as a decent measure of your overall creditworthiness. FICO offers some general insight into how they calculate this number: your credit usage, payment history, and account history make up the bulk of your score.

When you first know how your score is calculated, you have a better understanding of how to maintain it – sometimes against your best intentions.

This post has been updated to contain more recent information.

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