- Credit cards can either help or hurt your credit, and certain bad habits will have a damaging effect on your credit score.
- One habit to drop is maxing out your credit cards.
Don't put your credit at risk with these bad moves.
Credit cards affect your credit score. This probably isn't a surprise, since your score is affected by how you use debt. But, while most people know that what they do with their cards impacts their credit rating, they may not be sure exactly how.
You don't want to inadvertently hurt your credit score by adopting bad habits with your credit cards, so be sure to steer clear of these four behaviors that could do serious damage.
1. Maxing out your cards
Maxing out your credit cards is a dangerous financial habit to get into for lots of reasons. Obviously, if you max out your cards, it's harder to pay back your debt and your interest costs could be expensive. But your credit can also be hurt as well.
Charging too much on your cards hurts your score because it adversely affects a crucial factor used to determine it: your credit utilization ratio. This is the ratio of the credit that you have used versus the total credit available to you. If your ratio exceeds 30%, your score goes down -- and maxing out your cards means you're far above 30%.
If you want the best possible credit score, you should get into the habit of never charging more than 30% of your credit limit -- and ideally keeping your ratio even lower than that.
2. Paying your bills late
If you get into the habit of paying bills after the due date, this is going to hurt your credit score a lot. Payment history is the most important criteria when your credit score is set and if you are more than 30 days late, this will be reflected on your payment record.
Instead of falling into this damaging habit, be sure you're always paying your bill on schedule. Either set yourself a reminder or, better yet, automate your payment so it's withdrawn right from your bank account and can't be late.
3. Opening tons of new credit cards all the time
It may seem like opening a lot of new credit cards is a harmless habit, but it's not -- it can hurt your credit too. That's because average age of credit and inquiries are two other factors that are part of the credit score formula.
Average age of credit matters because lenders want to see you've long been responsible with your debt. A shorter credit history means they can't be as confident in your borrowing behavior. And opening lots of new cards makes your credit history shorter.
Inquiries, on the other hand, are placed whenever your credit is checked after a request to take on new debt. Lenders get nervous about lots of inquiries -- which you get when you regularly open new cards -- because they could signal you're on a borrowing spree and won't be able to pay everything back.
This doesn't mean you should never open new cards, but you should do it sparingly and space out requests for new credit.
4. Closing down old credit cards
Finally, if you get into the habit of closing down cards you're not using any more, you'll hurt your credit utilization ratio by eliminating some available credit. And you'll hurt your average age of account history, and lose the positive payment record those cards had.
The good news is, all of these habits are easy to avoid if you know about the damage they'll do. Just be smart about when and how you use your cards and you can protect your credit score so a bad rating doesn't make your life harder.
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