Having a healthy credit profile is undoubtedly a great idea. People with excellent credit score often get several benefits including better interest rates on mortgage and auto loans and so almost everybody with low credit score tries to improve their credit. If you’re also trying to improve your credit, make sure your effort goes in the right direction. Most people have no idea about what helps and what hurts their credit score. So unless you know the right ways to improve your credit, your effort is likely to go in vein.
Six credit-hurting approaches
Here are some approaches that can hurt your credit badly.
- Price comparison – Shopping around for the best prices is a very good move, but only theoretically. Practically comparison shopping can hurt your credit score. Whenever you shop around for best rates on mortgage loans, car loans or anything else, the lenders provide you with quote. But at the same time, they will check your credit profile with the credit reporting agencies. If your credit report shows that you’re entitled to take on huge debts, it is very likely to concern the lenders. Price comparison hurts people with limited or no credit history much more than those with excellent credit, as the former group is considered to be less experienced in balancing out adverse effects of frequent credit checking. So, if you have limited credit history, it would be better for you to avoid comparison shopping as much as possible.
- Avoiding credit completely – Living a debt-free life is a very good idea; but at times, it can be bad for you. Lenders often avoid borrowers without any experience in debt management. Lenders prefer borrowers who can make steady and timely payments. Avoiding credit completely may lessen your chance of getting a loan.
- Reducing credit limit – You may want to lower your credit limit to avoid overspending or piling up huge bill, especially if you’re sharing your card with your spouse or anybody else. But before doing this, you must give it a second thought. By reducing your credit limit, you’re likely to damage your credit score that you have built little by little.
- Closing your credit account – This can be a fatal approach towards your credit profile. People often get tempted to close their credit accounts after paying off the debts, but they don’t understand that it can seriously affect their credit score. Lenders always prefer borrowers with years of experience in handling credit card accounts. Therefore, even after paying off outstanding credit card debt, don’t close the account to carry on with your chance of getting loan when you need it.
- Keeping a small month-to-month credit balance – Making only the lowest required payment or paying below the actual due amount on your credit card can lead you towards more debts along with interests and fees. However, some people want to carry their debts, because they have a notion that carrying debt can prove their ability to handle and maintain their credit card account. But they don’t know that it can result in higher rates of interest on their credit card. Therefore, you should always pay off the balance at the earliest possible.
- Obtaining a departmental store card – A departmental store card helps people get discounts on purchases made at that particular store. But it can hurt the buyers’ credit score. It conveys wrong message to the lenders. To the lenders, opening such an account means that the borrower is taking on huge debts.
These are some mistakes that people often make and thus ding credit score. If you’re interested in improving your credit profile, you may try to avoid making these mistakes.
Author’s Bio – Jonny Pean helps people improve their personal finance through his finance-related blogs and articles. He currently works as a finance advisor for easyfinance.com.