Your credit score determines your borrowing potential. Having a low one can cost you. It can mean paying higher interest rates on mortgages, credit cards, and other loans.
Therefore, it is important to do what you can to develop the highest possible score. And you may be lowering your score without even knowing it.
Coming too close your credit limits
Credit utilization also affects your score. If you are bumping up against your credit card limit(s), the credit rating agencies can penalize you. Experts recommend that you spend only about 20 percent of your limits. Exceeding 30 percent is definitely ill-advised. If you want to spend more, and can afford the payments, you may want to ask your bank to raise your credit limit, or apply for another credit card.
Applying for too many credit cards
Each time you apply for a new card, ask for a credit limit increase, or apply for a loan, this information lands on your credit report–and stays there two years. For this reason, it’s best to weigh the costs and benefits of such actions. (Unless you think you have a good chance of getting a “yes” answer, it may be just as well not to even apply.)
Closing a credit card account is something else to consider carefully. Not only will it decrease your overall credit limit, and potentially raise your credit utilization, it can also cost you in other ways.
Relying on lower-quality types of credit
Not all credit is equal. Credit cards, student loans, mortgages, and car payments carry different weights in your credit rating. If you want a higher score, really take the time the research higher quality loans and see if you can afford it.
Running monthly balances on your cards
Your credit rating is an attempt to evaluate how likely you are to pay back your loans promptly. If you run balances on your cards month after month, that calls into question your ability—and possibly also, willingness—to pay everything back. So, keep your balances as low as possible—or better yet, pay them all off every month, if you can.
Of course, making late payments, or missing them entirely, also will hurt your credit rating.
The credit rating agencies will be monitoring your borrowing and repayment habits through your entire life. By taking the time to understand how credit scores work, you can learn how to achieve the highest possible score.