We are surrounded by tips to establish credit and improve our FICO score but not warned about what may hurt us or waste our time. We’re giving you the scoop below on 10 things to avoid while building your credit score.
1. Closing Paid-off Credit Cards
If you have already have a credit card (or two) and paid off a balance, don’t close the account. The mantra Mission Accomplished is not going to help you here. Instead, you’ll lower your credit utilization ratio, which is the credit available to you vs. the amount you have charged. “Don’t close the account unless there is a good reason, like a high annual fee,” advised Beverly Harzog, a consumer credit expert and author of The Debt Escape Plan (February, 2015). She warns that credit issuers may close the account if you don’t use the card for a certain number of months.
2. Charge to the Max
Don’t run up too much debt on your credit cards. You get a certain limit and that limit is not your “okay-to-spend-up-to-that-amount,” said Bill Hardekopf, CEO of lowcards.com, a consumer resource for credit cards since 2000. “When the balance on a credit card goes up too high, it becomes a negative mark on you,” said Hardekopf. The closer you charge to the maximum allowed on a card, the lower your FICO score.
3. Speak no Evil
Most student loans are deferred until six months after graduation. Since you aren’t making payments during those six months, nothing will ping negative on your credit report. But what happens if you can’t make the first payment? The worst thing you can do is to avoid the loan company. “If you anticipate having problems paying your loan, reach out for help right away,” said Gerri Detweiler, Director of Consumer Education for Credit.com. The approval process for some of the programs may take some time so don’t delay.
4. Watch That Credit Limit
Some credit cards come with an option to exceed your credit limit, similar to how a checking account may have overdraft protection. “Sometimes people opt in to have the ability to exceed their credit limit. It is harmful and you are charged a fee every time it happens,” Hardekopf said. “You don’t want to opt in to be covered if you exceed your credit limit. It’s better to have the transaction denied.” Exceeding your credit limit is dangerous because charging can get out of hand and you may not be able to keep up with your payments.
5. Too Much of a Good Thing
Don’t apply for too many credit cards at once. “This can hurt your credit score because it may give the appearance that you are hurting and in financial stress, which can be a red flag to credit reporting agencies,” said Hardekopf.
6. Utility and Cell Phone Payments
If you have any reoccurring gas and electric payments and think the accounts will increase your credit score, think again. Paying these bills on time will not increase your FICO score, but it’s important to pay them on time anyway. Interestingly enough, paying them late will hurt you. “Even your cell phone bill can be reported to the credit bureaus if the bill is not paid on time,” Harzog said.
7. Lonely Installment Loan
Student loans don’t pull a lot of weight toward your FICO score. “A student loan is a type of installment account, one where you receive a certain amount of money and a certain amount of time to pay it back,” Detweiler said. “The credit reporting agencies want to see a mix of different types of credit.” So, it’s good to have a mix of a couple of different kinds of accounts.
8. Prepaid Credit Cards
A prepaid credit card is one in which you post funds to the card and use the card to make purchases. This is the same as using a debit card linked to your checking account. You are spending your own money, not using credit. Harzog points out that prepaid cards with a Visa or MasterCard logo can be misleading.
9. Use it or Lose it
A credit card that isn’t being used will help your utilization ratio, but won’t prove that you make payments on time. If you have a card you haven’t been using, find a reason to do so. “I suggest keeping the card and using it once a month, to keep it active,” said Harzog. “Use it for an automatic payment on a health club membership, or other pre-set monthly fee.”
10. Pay Early
Paying your bills early won’t raise your credit score, but it’s a good practice and will help you avoid accidental late payments. “We always advise people to pay your bills as soon as you receive them,” Hardekopf said.