It’s true that a credit card can be a great financial tool. When used properly, your credit card helps you build a credit history, and quickly establish a good credit score. However, as with so many things in life, there is a downside to credit cards. Because they are such a big part of your credit history, seemingly small mistakes can add up to make a big impact on your credit score.
Be aware of how your credit score is affected by your credit card habits. Here are 5 credit card mistakes that seem small at first, but if made too frequently — or made together — can add up to overwhelm your credit score, sending it lower:
1. Paying Late
Your payment history is the most important aspect of your credit score. This means that if you are late in paying, it will be noticed and affect the credit scoring algorithm. Many credit reports list your payment for each credit card every month for the past three years. One or two late payments in that period of time might be overlooked. However, if it appears that a habit is forming, you could find yourself in trouble.
Tip: Always make your credit card payments on time, every time.
2. Maxed Out Credit Card
When you max out your credit card, it looks as though you have money problems. Not only that, but a maxed out credit card can mean that any sort of a fee triggers you going over your limit — and that comes with its own penalties and credit scoring problems. Try to keep your credit card spending to no more than 25% to 30% of your credit limit. With your credit utilization accounting for the second-biggest chunk of your credit score, this is important.
Tip: Only use a portion of your available credit on each card. You can do this by using more than one card, or increasing your credit limit so normal spending doesn’t bring you close to the card limit.
3. Department Store Credit Cards
The type of credit you carry matters. Major issuers are considered “better” credit card debt than others. This means that the more department store credit cards you have, the worse it looks on your credit report. Don’t apply for these cards just for a discount.
Tip: Limit your credit cards to those from major credit card issuers, banks, and credit unions.
4. A Rash of Credit Card Applications
Applying for a credit card will slightly ding your credit score because it is a hard inquiry. One or two applications probably won’t impact your score too much. However, if you apply for several credit cards all at once, all of those dings start to add up. Combine your rash of credit card applications with a growing balance on your other cards, and applications for department store credit cards, and the red flags begin to weigh on what lenders see as your creditworthiness.
Tip: Limit the number of credit cards you apply for.
5. Closing Credit Card Accounts
At first glance, closing a credit card account or two seems like it’s a good thing — not a mistake. However, closing your accounts can impact your score. First of all, it reduces how much credit you have available, which isn’t always a good thing from a creditor standpoint. Second, it reduces the length of your credit history. Your credit history length includes a consideration for your oldest account, as well as the average length of all your accounts. If you close a credit account, you affect your average. If you do end up closing a credit card account, pick a newer card to close.
Tip: Leave your credit card accounts open, but only use them a few times a year to keep the accounts active.