Is improving your credit rating really as simple as opening or closing the right accounts at the right time? If only creating a stronger, more favorable impression on your credit record were that simple. The truth is that these tricks aren’t the open-and-shut solutions they’re often portrayed to be. Sometimes they end up doing more harm than good.
What you don’t know about opening new accounts or closing existing ones can hurt you, squelching your credit rating instead of lifting it up. Don’t fall for these common credit rating mistakes.
Common credit account mistakes
Don’t close revolving accounts as soon as you pay them off. It’s tempting to spike the ball by closing an account as soon as you’ve finished paying it off — what a touchdown celebration! — but you need that history of payment on your record. Paying down a credit card shows you’re disciplined and financially responsible, and creditors will count that as a shining spot on your credit history.
Your shiny, zero-balance accounts form the foundation of your credit utilization. Credit utilization is the amount of credit you’re actually using (what you owe) versus the amount you have available to you (what you could still charge). If you have $10,000 total in available credit and you’ve run up $2,000 in bills, your credit utilization stands at 20%.
Less than 20% credit utilization is good; under 10% is even better. Closing down unused accounts reduces your total credit limit and increases your credit utilization. Because credit utilization forms the basis for nearly a third of your credit score, high credit utilization can put a big black mark on your credit rating.
But don’t try to lower your credit utilization by opening new accounts. What if you tried lowering utilization and therefore increasing your credit score by opening new accounts in order to increase your available credit? Bad idea, say the experts. All those “hard inquiries” on your credit report will have a negative impact on your credit rating. Creditors will wonder why you’re orchestrating a flurry of new credit cards. Could you be desperate for ways to cover your current expenses? Are you likely to get in over your head?
What really works to improve your credit score?
The most effective ways to get your credit rating moving upward are the kind of responsible habits that stem from financial reliability.
Pay your bills on time. Though it might win the award for least exciting credit tip of the year, paying your bills on time every single month will eventually build a rock-solid credit history.
Manage your credit debt responsibly. Maintain your revolving utilization to 30% or less.
Once or twice a year review your credit report to ensure the reported information is accurate. Also, think about obtain purchasing a credit monitoring service that alert the consumer when there has been a change with the credit.
Build a strong foundation
Credit mistakes can send your finances tumbling unless you’ve already built a strong, safe financial foundation. Even if you’re just starting out or working to pay off a sizable debt, establish an emergency fund so you’ll always have a financial safety net to catch you. Nothing matches the security of knowing you can cover the kind of surprises life throws out on a regular basis — the kind that can blindside your checking account. PenFed Credit Union can help you start growing your savings today.