Maintaining a good credit score isn’t rocket science; you just have to know what to do and what not to do. Keep in mind that while it takes time and consistency to build a good score, all it takes is an isolated slip-up to undo years of good credit habits. And a low credit score can impact your ability to get a loan, buy a home, or even rent an apartment. To help you avoid this easily avoidable scenario, here are five financial myths that will actually lower your credit score.
Myth #1: You have a grace period for credit card payments
It may be fun to show up fashionably late for a party – but don’t make this a rule for all facets of your life. Missed payments can reduce your credit score by 100 points or more! When it comes to credit card payments, make certain that you have allowed for “wiggle room” of at least one to two business days for the payment to arrive by the statement due date.
Myth #2: If you have too many credit cards, you should close a few
If you find newer credit card products with a more competitive rate or rewards plan than your current card offers, call your current card issuer to potentially negotiate new terms before you walk away. Don’t be shy; they want to keep your business! The longer you can hold a card in good standing, the better it is for your credit score, so weigh your options well.
Myth #3: You should charge everything on one card to get great rewards
30% of your credit score is based on what you owe, compared to your available credit. If you charge everything and pay the balance in full each month to take advantage of credit card rewards (which seems like a great idea in theory), you may be unintentionally lowering your credit score. Why? Because to a lender, balances that are close to the credit line translate to a lack of cash flow, and appear that you are “over utilizing” credit. In turn, your credit score is lowered. Know the credit limits on all your cards, and how close you are to them. Offset the impact by using two major cards each month, even if you only charge a small amount to one of the cards, and pay it in full at the end of the month. The use will ensure that your largest available credit lines are active and open, and keep your “utilization ratio” healthy.
Myth #4: If you find you’re overspending, cut up your credit cards
This may come as a surprise, but getting a credit card “out of sight and out of mind” by cutting it up, not activating it, or throwing it in the back of a drawer is not a good financial move. Doing so doesn’t mean that the card is off your credit report. Your credit score is partially calculated by how many open lines of credit that you have. When you forget about a card, you’re more likely to lose track of the account, and apply for new cards—which will ultimately lower your score.
Myth #5: You should absolutely refinance your home when interest rates are low
If you’re rate shopping in order to refinance your home, make sure that you limit the amount of hits to your credit report by speaking to the mortgage lender about all the details of the refinance offer before you allow them to make an inquiry into your credit. If you know your credit score (which you can and should access for free each year with a site like annualcreditreport.com), the lender can estimate what your refinanced payments will be. Only move forward with the credit inquiry if you are certain you are comfortable with the terms of the refinanced loan. Likewise, consider the length of your mortgage loan before you refinance. Because history matters in your credit score, remember that the refinance will essentially “wipe” the mortgage loan off your active credit. Losing a loan that you have had for ten or more years can dip into your credit score.