Everyone knows the importance of a good credit score. Unfortunately, not everyone knows how to go about maintaining and/or improving their credit. Good intentions can nevertheless lead to bad decisions if you unaware of how your score is calculated. With that in mind, if you are attempting to improve your credit, there are certain pitfalls you may want to avoid.
Closing Accounts
The idea that closing existing accounts is the best way to remedy failing credit is a myth. Closing accounts not only affects your credit history, but your credit utilization, which accounts for 30 percent of your total score. Actually, closing an account will likely drop my credit score, whereas simply leaving the account open and paying down the balance would have the opposite effect.
New Cards
In most cases, applying for a new account is a bad idea. First of all, credit inquiries account for 10 percent of your total score. In addition, each new account affects the average age of your credit, which accounts for 15 percent of your total score. Finally, using your new account will again increase your credit utilization. However, if your other cards are either closed or in poor standing, opening a new account does have potential benefits.
Paying Down Balances
Common advice says to pay down your higher balances first, which is certainly beneficial if those accounts also carry the highest interest rate. While that approach will save you in monthly interest, your credit may benefit more from paying off lower balances, as they can have a more positive effect on credit utilization. For instance, if you are using $2500 of $5000 on one account, and $750 of $1000 on the other, addressing the lower balance will prove more beneficial to your score.
Balance Transfers
While balance transfers can be quite tempting due to promises of lower interest rates, they can negatively affect your credit if not used sparingly. Not only do they affect your credit utilization, but if you’re opening new accounts to take advantage of such deals, you’re adding inquiries to your credit report and affecting your credit age. If you must use balance transfers, remember to use no more than 30 percent of the new account limit.
Neglecting Your Credit Report
In order to improve your credit score, you need to monitor your credit report. As this information is the basis of your score, you want to ensure that it is accurate. Check credit report allows you to dispute errors and boost your score by having inaccuracies removed.
Doing It Right
As payment history accounts for 35 percent of your credit score, the best way to improve your credit is by keeping your accounts current. Always pay your bills on time and if you do have accounts that are past due or in collections, make paying off those debts a priority. While you can’t change your credit history overnight, with persistence and responsible money management, in time you will see a marked improvement in your credit score.
The idea that closing existing accounts is the best way to remedy failing credit is a myth. Closing accounts not only affects your credit history, but your credit utilization, which accounts for 30 percent of your total score. Actually, closing an account will likely drop my credit score, whereas simply leaving the account open and paying down the balance would have the opposite effect.
New Cards
In most cases, applying for a new account is a bad idea. First of all, credit inquiries account for 10 percent of your total score. In addition, each new account affects the average age of your credit, which accounts for 15 percent of your total score. Finally, using your new account will again increase your credit utilization. However, if your other cards are either closed or in poor standing, opening a new account does have potential benefits.
Paying Down Balances
Common advice says to pay down your higher balances first, which is certainly beneficial if those accounts also carry the highest interest rate. While that approach will save you in monthly interest, your credit may benefit more from paying off lower balances, as they can have a more positive effect on credit utilization. For instance, if you are using $2500 of $5000 on one account, and $750 of $1000 on the other, addressing the lower balance will prove more beneficial to your score.
Balance Transfers
While balance transfers can be quite tempting due to promises of lower interest rates, they can negatively affect your credit if not used sparingly. Not only do they affect your credit utilization, but if you’re opening new accounts to take advantage of such deals, you’re adding inquiries to your credit report and affecting your credit age. If you must use balance transfers, remember to use no more than 30 percent of the new account limit.
Neglecting Your Credit Report
In order to improve your credit score, you need to monitor your credit report. As this information is the basis of your score, you want to ensure that it is accurate. Check credit report allows you to dispute errors and boost your score by having inaccuracies removed.
Doing It Right
As payment history accounts for 35 percent of your credit score, the best way to improve your credit is by keeping your accounts current. Always pay your bills on time and if you do have accounts that are past due or in collections, make paying off those debts a priority. While you can’t change your credit history overnight, with persistence and responsible money management, in time you will see a marked improvement in your credit score.