As the ongoing credit crunch forces lenders to tighten their wallets, credit scores have become more important than ever. In short, you currently need a stellar score to secure the lowest interest rates. Be sure not to commit any of these common money mistakes.
1. Close old accounts
After whittling a credit card balance down to zero, closing the account may seem like the responsible (and liberating!) next step. Shutting down an account will affect two major components of a credit score - the credit history and the utilization ratio, which weighs the amount of credit one has against the amount one’s using. Instead of closing the account, set up the card to auto-pay one small bill and deduct the balance from a checking account each month.
2. Put cards on ice
Freezing a credit card or burying it in the backyard is such age-old advice, it's practically a cliche. But letting any account go stale isn't a smart solution. If an account goes dormant, the company may stop reporting it to the credit bureaus - or it may be shut down completely. Again, the simplest solution is to set up an automatic monthly payment to keep the account active and maintain your credit history.
3. Go on a credit bender
Opening new credit card accounts may seem like a good way to rack up more available credit, but every time a potential lender looks at your credit score, it counts as an inquiry - and stays on your report for two years. Too many inquiries could hint that one is planning to open up several new lines of credit. But what if someone is shopping around for a mortgage or car loan and simply wants to find the best rate? No worries - as long as the applications are finished within 30 days, a credit score won't be affected.
4. Don't sweat the small stuff
If juggling several sources of debt - experts will say to chip away at high-interest accounts first. But realize that everything from unpaid parking tickets to library fines can wind up on a credit report. Look out for smaller bills that may have been overlooked. A few leftover pennies on a utility bill may haunt ones credit report for years. Contact your lender and ask for a little lenience; more lenders are willing to be flexible right now
5. Consolidate loans
Merging debts might make it easier to keep track of bills, and it could help avoid astronomical interest rates. But lumping all loans together can also reduce debt ratio if not careful. Consolidating isn't always a bad idea - do the research and find a good rate, this could save thousands in interest, and that might offset any resultant blip in a credit score.
6. Charge everything
With credit cards offering attractive rewards programs, it may be tempting to put every purchase on plastic. But even if paying a balance in full every month, racking up too much debt can wreck a score - points are given for paying on time, but a credit report will show a consistently high balance.
7. Stay debt-free
In a topsy-turvy economy, one may be tempted to avoid all debt like the plague. It's a good idea in theory, but with no dime of debt, lenders have no way to gauge whether a person will be a reliable borrower. A sizable chunk of a credit score reflects the ability to handle a few types of credit (such as mortgages or revolving credit). No debt means no track record - and that could cause one’s score to suffer.
8. Cross fingers
No one ever wants to find out about a flaw in their credit report when bidding on a new house or negotiating with a car dealer. So be proactive: Once a year everyone should request a free copy of their credit report from annualcreditreport.com, which is sanctioned by the Federal Trade Commission. If anything is fishy is spotted, file a dispute form immediately and keep a written record of it. After all, its hard work to ensure the best credit score possible - and it's up to the individual to make sure their prudence is paying off.
