Credit scores are an important fact of life. They dictate the interest rates you’ll pay for loans, whether you’ll be able to secure a mortgage, and in some cases, your credit rating may even factor into an employer’s decision to hire you. Nevertheless, credit scores and what drives them can be confusing—and misunderstandings are costly. Here are the facts behind three common credit confusions.
Credit Confusion #1: Opening a store credit card for the discount won’t impact my credit score
Are you lured by the sales pitch to “save an extra 10% on your purchases” by opening a store credit card? Even if you plan never to use the card, it does impact your credit score, and might cost you far more in the long run than the savings it offers. When stores are able to instantly approve you for credit, the process involves what is called a “hard inquiry” on your credit file. According to experts at CreditCards.com, they can impact your credit score by as much as 30 points. To lenders, applying for too much credit makes you appear cash-strained, even if you’re just trying to take advantage of a discount. Assuming you are approved for the store card, it is reflected on your credit report as active—even if you destroy it upon arrival.
Credit Confusion #2: Using too much of your available credit balance
Do you use your credit card for nearly every purchase, and pay it off in full at the end of the month? That strategy is a great way avoid interest and maximize your credit card rewards points, but you should also pay attention to how close you are getting to your credit limit each month. 30% of your credit score is based on how much of your credit you are using, compared to the total line of credit you have available—even when you pay the balance in full. For example, if you charge $3,000 a month on a credit card that has a $5,000 limit, you’re utilizing 60% of your credit. Regardless of whether you “need” to charge your purchases, it appears to creditors that you are living off of credit, and it doesn’t bode well for your score. You can offset the utilization ratio if you have other major cards that are active, have a significant available credit line, and are in good standing.
Credit Confusion #3: Closing credit cards to boost your credit score
The duration of your credit history plays an important role in your credit score. Keeping open active accounts that you have had for many years will actually boost your credit score because it speaks to a positive payment history. In fact, you should try to use the credit cards you have had for a while on occasion, to keep the card actively reported. By contrast, closing a card shortens the duration of your measurable credit history, and can actually reduce your credit score.
Keep in mind that your credit score is not irreparable! Rebuilding your credit history takes time–each transgression carries its own timeline–but by being informed and consistent in how you utilize your credit, you’ll be well on your way to raising your credit score.
Stephanie Taylor Christensen is a former financial services marketer who covers personal finance, consumer issues, work-life balance and health/wellness topics for ForbesWoman, Minyanville, SheKnows, Mint, Intuit Small Business, Investopedia and several other online properties. She is also a marathon runner, yoga instructor and founder of WellnessOnLess.