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3 Counterintuitive Ways You Can Hurt Your Credit Score

creditscoreThe world of credit scoring is very nebulous and difficult to understand. The credit bureaus have made it so that most people do not know how their credit scores are calculated. Many people think that all you have to do is pay your credit cards and other accounts on time, and your credit score will be fine. Of course, paying your bills on time is always a good idea. But there are other factors which go into the credit score calculation which can seem counterintuitive or downright idiotic. But despite the way they may appear, keep these things in mind in order to avoid inadvertently harming your credit score.

Be careful about closing credit cards

People close credit cards for many reasons. Perhaps they are tired of paying the annual fee, or the card’s rate is too high, or they simply have too many open lines of credit. But it is a good idea to think twice before closing out that card. This is because the credit bureaus use your overall credit utilization as a factor in determining your credit score. Say for example you have 2 credit cards –both with a $10,000 limit. Say you start off with zero balances and go on a European trip. One of your cards gets declined a few times, so you are stuck using the other card, right up to the limit. When you get home you call the customer service for the card that didn’t work, and get into a heated argument, and close the card. So, at first you had a $10,000 balance on $20,000 availability between the two cards. But after closing one of the cards you are left with just one maxed out card. That is not good for your credit score. Only close cards when your resulting utilization will be less than 50 percent of availability.

Shopping for credit can hurt your score

Many people think that every time a company pulls your credit report your credit score takes a hit. That is not necessarily the case. But applying for with multiple companies for different kinds of credit can have an effect. Granted, these kinds of situations can be incredibly specific. But consider the following example: You are preparing to move to a more natural part of the country, and want to trade in your Ford Focus for a pickup truck. You are unsure which make of truck you want, so you go to three or four dealerships to see what deals they can offer you. They all talk you into a credit pull. The same week you go to Lowe’s and Home Depot looking for supplies and decide to apply for their credit cards too. This kind of accessing your credit multiple times for different kinds of credit can have an impact.

Paying Cash

People who only have credit cards on their credit reports, and do not have any personal, home, or auto loans, may find it difficult to get obtain excellent credit. This is because the credit bureaus tend to look favorably upon diversity of credit -people who have different kinds of credit in their credit histories. One way to develop credit diversity, even if you have the cash to pay for a car or home, is to take the loan and repay it quickly. This practice is not cost-free; you will have to pay some interest or fees in the process. But at least you will know that your budding credit will be there when you need it.

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