Are you trying to build your credit history and increase your credit score? Achieving an excellent credit score can take some work. So if you are trying to boost your score, you want to make sure that you are doing everything possible to work toward creating a positive credit history. Here are five things that you are doing to hurt your credit, and don’t even know it.
This post is sponsored by CreditRepair.com. All opinions are mine alone and are honestly conveyed.
Did you know that there are things that can harm your credit score other than just making late payments or defaulting on accounts? In fact, you may actually be handling your credit in a way that is keeping your score low and don’t even know it.
Paying in cash
Believe it or not, using cash to pay for everything can actually hurt your credit score. Saving up and being able to buy items with cash seems like the responsible thing to do, right? And we have heard from many sources that using cash is a great way to keep your budget balanced and not overspend and wrack up a bunch of debt. All that is true. It is great to live debt-free and ensure that you are overextending your monthly budget. However, using cash to purchase everything doesn’t allow you to build a credit history. So while you are keeping your budget in check, you are doing nothing to help increase your credit score. While it may seem counterintuitive, you do want to use credit on a consistent basis. The key to using credit though, is to do it in a controlled and disciplined way.
How does using credit increase my credit score?
When you use credit cards each and every month to pay for some of your expenses, the credit card will report the open balance to the credit bureau, and then when you make a payment, that gets reported to the credit bureaus as well. You don’t need to charge large amounts, just enough for a creditor to report each month to the credit bureau on you. For example, you may want to just use a credit card to charge gas for your car each month and then pay it off when the bill comes. This will keep the credit card usage to a minimum, but allow you to build your credit history in a controlled way.
Closing older credit cards
If you have a credit card that you’ve had for a while, it may actually hurt your credit score to close it. While you may not want to have too many accounts or credit cards open in your name, the older accounts represent a known credit factor to the credit bureaus. So when your score is calculated, the history of your payments relating to that card help boost your score when you’ve made payments on time. Or even if you don’t have a balance on the card currently, it shows that you are able to have access to a credit line and responsibly use it. If you close that credit card, that card will no longer report on you and if you want another one in the future, you will have to start over. Each new account that you obtain takes time to boost your score because of the uncertainty of what your payment pattern will be to the newly established creditor. Keeping some of those old accounts open, shows stability and can ultimately raise your score.
Maxing out credit cards
If you have a credit card that has a maximum limit of $10,000, you really don’t want to charge more than $5,000 on that particular card. Having a high balance to limit ratio can actually decrease your credit score. Why? Because it indicates to the lender that you may not be in control of your finances and will spend until you are limited by the creditor. Additionally, if you are actually over the max limit because of interest or fees, it will damage your score even more. Keeping those balance to limits ratios low will boost your score because it shows that you can use credit responsibly and also pay it back on time.
Co-signing for a friend
While you may want to help out a friend who is in need, it may not be the best idea to co-sign a loan for them—especially if they have less than perfect credit. Any time you co-sign on a loan, you are also financially responsible for the payments on the loan. While you and your friend may agree that you won’t have to actually make the payments for the loan, if your friend makes late payments or defaults on the account, that payment history will also show up on your credit report. You should co-sign for someone else very cautiously. If you are willing to sign on the loan, then you also must follow-up to make sure the payments are being made on time.
Stop paying on accounts before your divorce is finalized
If you are going through a divorce, a judge may rule that certain accounts are your responsibility and some are going to be the responsibility of your ex. However, if they are joint accounts, you don’t want to stop making payments on an account until your name has actually been removed from the account entirely. As long as your name—and social security number—are connected to the account, whatever the payment history is, will also report to the credit bureau for your name as well. Having a court order is not enough to get items removed from your credit report if your ex is supposed to start making the payments. When you have signed as a responsible party on a mortgage, loan, or credit card, you must make sure the payments are made on time. If necessary, continue making payments even after the court order has kicked in to ensure timely payments. It is much easier to have your attorney file the paperwork to get the money back from your ex than to try to rebuild your credit after allowing several months of late payments—or no payment at all.
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