Getting your financial life in order is no small task. Figuring how to pay off debt, put aside money for retirement, and still have a little leftover for fun can feel like an uphill battle.
To complicate matters further, it turns out there are five “smart” money habits that could do damage to your credit score. Frustrated? Don’t worry – the Nerds are here to help!
1. Using a cash-only budgeting system
Instead of using a credit card for daily purchases, some folks just use cash. This is a budgeting technique that makes it almost impossible to overspend. Proponents of this approach withdraw a certain amount from the ATM each week, and when it’s gone, it’s gone.
This strategy might appeal to you as a way to control your spending. But before you jump on board, know that this tactic could hurt your credit score – or at least curtail your other efforts to improve it.
By avoiding credit cards, you’re missing out on an easy opportunity to build a solid score. Using plastic responsibly (paying your bills on time and in full) is a great way to keep your credit climbing. This is something to think about, because a high score will come in handy when you want to rent an apartment, get a good rate on an insurance policy or borrow money to buy a car.
As long as you keep a watch on your spending, using a credit card for your day-to-day purchases shouldn’t interfere with sticking to your budget.
2. Closing a card you’ve just paid off
Paying off a mountain of credit card debt is a huge accomplishment – congratulations! But if you’re planning to celebrate by calling up your credit card company and canceling your card, you might want to take a beat and think carefully about what this could do to your credit.
By closing a paid-off card, you’re eliminating a lot of available credit from your overall portfolio. If you’re carrying a balance on other cards, this will immediately cause your credit utilization ratio to shoot up. This, in turn, will do damage to the 30% of your credit score that’s determined by your amounts owed.
If you really feel like you’ll be tempted to overspend by leaving the card open and you’re not carrying debt on your other cards, closing out your plastic might be OK. But otherwise, it’s probably best to keep your account open.
3. Putting an old credit card aside and never using it
Since you now know that closing a paid-off card isn’t always a great idea, you’re probably planning to just stash your plastic in a drawer somewhere and never use it. But, unfortunately, this can have credit consequences as well.
Going for a long period of time — think several months or a year — without using a credit card could cause your issuer to cancel it. If this happens, you’ll be faced with the same credit score implications as if you’d canceled it yourself (see above). Again, this is especially harmful if you’re carrying a balance on other cards.
To avoid this, be sure to use all of your cards from time-to-time, even just for a small purchase. By keeping all of your accounts active, you’re decreasing the chances that an issuer will close one of your cards.
4. Relying too heavily on automatic payments
Since a whopping 35% of your credit score comes from your history with paying bills by their due dates, signing up for auto pay is definitely a smart move. Nevertheless, it’s a good idea to take a “trust but verify” attitude toward this service.
In the vast majority of cases, auto pay will ensure that your bills will get paid on the date you’ve designated. But it’s always prudent to check your accounts from time-to-time to be sure that the payments went off without a hitch. If something goes wrong, you could get hit with a late fee – or worse, a ding to your credit score.
5. Opening a bunch of cards to capitalize on rewards
If you’re getting savvy about using credit cards to earn rewards on your daily spending, you’re probably feeling excited about the possibilities. You might have even cooked up a plan to open several cards with different rewards structures so that you’ll be maximizing perks no matter where you shop.
The Nerds love rewards credit cards, but don’t get carried away and open too many at once. Doing so can hurt your credit score because 10% of it is determined by recent credit inquiries. Too many at once could cost you a lot of points, so be sure to put several months between each of your card applications.
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