There are certain decisions that people make when it comes to credit that seem like smart choices up front, but can in fact actually damage credit scores. Obviously, one of the best ways to obtain and keep a good credit score is to pay your bills on time. But that’s really just one small part, you need to look at the bigger picture and at some not so wise decisions:
Paying off all credit card debt. Paying off debt always sounds like a good idea, however if you have no revolving balances it can actually hurt your credit score. If you have several credit cards, a better plan is to pay them all off except one. Keep a small balance on it, even if it’s only $10. The Credit Bureaus like to see at least one small revolving balance. So to optimize your score it is always best to not completely pay off all of your revolving balances.
Closing credit cards. If a person has a LOT of credit cards and they don’t use most of them, then closing a few of those might be ok. However if a person only has four or five credit cards then closing them could have a negative impact on the scores. The bureaus like to see several credit cards with no balances but that have a long history with no late payments. Closing a credit card that you have had for a long time yet has no balance can have a very negative effect. Not only are you closing out all the history on that card but you are reducing your possible credit utilization. If a consumer has several open credit cards and only a few balances, it looks positive because even though they have the ability to utilize the cards, they have self-control and don’t use them. If a consumer absolutely wants to close credit cards because they have quite a few then it would be best to close the cards that have the shortest history on them.
Declining a higher credit limit. We all get offers periodically from credit card companies offering to raise our credit limits. This is a good thing! If you have a high balance on that card, raising the limit will lower the balance to high credit ratio which can help the credit score. Optimally any revolving balance should be below 10% of the credit limit but that’s not always possible to do. So the higher the credit limit, the better!
Making a partial payment. Some people think that if they can’t make even their minimum payment on a credit card that just making a partial payment will at least help, however that is not true. It is always best to make more than the minimum payment, but if that’s not possible, it is imperative that at least the minimum payment be made. If just a partial payment is made, the creditor will most likely still report you 30 days late for that month. And if partial payments are made several months in a row it is possible that they will charge off the account and turn it over to collections. So making the minimum payment is a MUST!
Paying off your mortgage or auto loan early. As with credit cards, the bureaus like to see at least one installment balance. If your only installment balance is your mortgage or auto and you pay if off, you will lose the history and have no installment balances on your credit report. This can significantly damage your credit score. The bureaus want to see a mix of revolving and installment balances.
Before you make any decisions regarding your credit, it is always best to do your research. What sounds like a good idea at the time could turn out to have just the opposite effect on your credit scores.