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3 Financially Responsible Things…

That Will Ruin Your Credit Score

May 28, 2014 by  
Filed under Blogs, Credit Score

by: .
common credit myths

There’s a lot of advice on the internet about managing your finances and credit, some useful, and some that is completely wrong. You see, doing something that most consider financially responsible isn’t always going to benefit your credit and in some cases will actually hurt your credit scores.

So lets take a look at 3 common “financially responsible” tips that actually hurt your credit.

1. Asking for a lower credit limit

If you have trouble controlling yourself around a credit card, lowering your credit limit can hedge the amount of debt that you can accumulate and protect you from yourself.

But, considering that 30% of your credit score is calculated from your credit utilization rate (the percentage of debt you owe in relation to your credit limit), lowering your limits will increase the utilization rate and lower your credit scores.

Try to show some restraint and not use up all of your available credit limit. Keep your credit card balances at or below 20% of the credit limits, and watch your scores increase.

2. Paying off an installment loan early

Paying off your mortgage or auto loans early may seem like a good way to improve your credit, but it’s not.

I know this goes against logic, but stick with me here.

Paying off an installment loan early raises your utilization ratio. That’s right, credit utilization is not just calculated from credit cards, but installment loans like auto loans and mortgages too.

For example, if you have a $20,000 auto loan with a $5,000 balance ($5,000/$20,000=25% utilization) that you pay off early, your available credit will drop by $15,000, the utilization rate will become N/A, and your score will drop. (The utilization rate only counts open and active accounts).

Now, I’m not saying that you shouldn’t pay off your debt early, you just need to consider the repercussions. Paying off your installment loans early can save you a lot of money in interest. But if you’re trying to raise your credit score, it’s a better idea to pay off your credit cards, which will still remain open, even with a $0 balance.

3. Opening a bunch of credit cards all at once

Our first two points lead us into our third. Some people think that the best way of lowering your credit card utilization rates (the balance to limit ratio), is by opening up as many credit cards as possible, in order to increase the amount of available credit.

And although it sounds good in theory, there is a major issue with this, every time you apply for credit, an inquiry is reported to your credit report. Too many inquiries and your credit score drops. How many is too many? Experts say that you should limit yourself to one inquiry every 6 months.

So don’t apply for too much credit at once and lower your credit card utilization rate the old fashion way, pay down your credit cards.

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