Published in: Credit Cards | Nov. 28, 2018

5 Credit Card Mistakes That Could Be Tanking Your Credit Score

Are you using your credit cards the wrong way and hurting your credit score? Find out here if you're making mistakes that could cost you.

two arrows on a road sign, one saying "right" and the other saying "wrong"

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The average American has 2.6 credit cards, although this includes people who don't have any cards at all. Among cardholders, the average is 3.7 cards.

Having credit cards is convenient because you can buy what you'd like without carrying cash, you're protected from fraudulent transactions, and you can earn rewards for everyday spending. But, if you don't use credit cards correctly, you could actually end up hurting your credit score -- which is one of the most important numbers that shapes your financial future.

You don't want to damage your credit because of mistakes with your cards, so avoid these five big errors that could cause your credit score to go tumbling down.

1. Opening lots of new credit card accounts

Credit card issuers offer a lot of incentive to get you to open new credit card accounts. From rewards bonuses for signing up for a card to special discounts if you open a retail store card, the incentives to sign up for new credit are endless.

While it seems harmless to say yes to yet another credit card if the rewards are good, every time you apply, the issuer looks at your credit report and an inquiry is recorded. Inquiries stay on your report for two years and too many lower your score since applying for tons of credit is a red flag to lenders that debt will become unmanageable.

To make sure you don't hurt your credit score, restrict how many new cards you open. And, if you have a big purchase coming up you'll need to borrow for -- such as buying a house or a car -- wait to open new cards until after the transaction is done.

2. Closing old accounts you don't use anymore

If you have a bunch of old credit cards sitting around, it may seem smart to close them. Unfortunately, this is actually a bad idea and could hurt your credit score in a few different ways.

One of the key factors that determines your score is your credit utilization rate. This ratio looks at how much you owe compared with the amount of credit you have. If you owe $5,000 and have $10,000 in available credit, you have a 50% utilization ratio. That's too high, as most credit scoring formulas ding you if you use more than 30% of available credit.

If you close accounts, you reduce your available credit. If that $10,000 in available credit came from two cards, each with $5,000 credit limits, you'd suddenly have a 100% utilization ratio if you close one of the cards. Your credit score would fall because of it.   

Closing accounts also hurts your score because average age of credit is another key factor in determining your credit rating. The older your accounts, the more evidence to show how you handle credit and the higher your score -- provided, of course, you've been responsible. If you close old accounts, your average age of credit is shorter and your score falls because of it.

Not only should you avoid closing accounts intentionally, but it's also a good idea to use those old cards every once in a while. Otherwise, your card issuer may close the card due to inactivity, hurting your score through no fault of your own.

3. Maxing out your credit cards

Maxing out your credit cards is also bad news because of your credit utilization ratio. When you get close to your credit limit, your score is lower because of concerns you can't manage your money.

It can be tempting to just ask for a credit line increase if your cards get near the limit -- and indeed, this can improve your utilization ratio. The problem is, some card issuers run a credit check if you ask for a credit line increase -- which means an inquiry on your report.

Not all lenders check your credit with every increase, though, so you may want to talk with your lender about whether your credit limit can be raised without an inquiry. Of course, raising your credit limit is a good idea only if you won't max out your credit card -- otherwise, extra interest on your higher debt balance will cost a fortune.

4. Never using credit cards

While opening too many cards or maxing out your credit line is bad news, it's also a big problem if you never use credit cards.

That's because you need to show a history of responsibly paying different kinds of debt to build a good credit score.  And, for most people, credit cards are one of a few primary types of debt used to build a positive payment history, along with a car loan and student loans.

If you're not comfortable using credit because you're afraid of getting into debt, one easy solution is to set up a small recurring payment -- such as paying your cell phone bill -- with a credit card. You can make an automated payment to pay off the card in full so you never carry a balance and you'll build up month after month of positive payment history without taking the risk of landing in financial trouble.

5. Paying your cards late -- or not at all

Finally, the biggest mistake of all is to have a credit card and not pay what you owe on it. When you make a late payment, this is reported to the credit bureaus and affects your credit score. A single late payment could cause your score to drop by more than 100 points if your score was previously good -- and the later your payment, the worse the damage.

Payment history is the most important factor in determining your credit score, so you can't afford to make a mistake. Set up automated payments for the minimum due if you aren't sure you'll remember to pay on time -- although you should try to pay off your balance in full each month. And, if you've had a late payment in the past, consider writing a goodwill letter to ask your credit issuer to remove it if you've generally been a good customer.

Don't let your credit card use damage your credit score

Your credit score affects everything from what price you pay for auto insurance to how much your mortgage costs. You can't afford to damage your credit because you don't know how to use your credit cards properly. Avoid these five big errors and work on good behaviors -- like paying bills on time -- so you can give your credit score a boost and hopefully earn an excellent rating.

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