Are you sabotaging your credit score ?
By Colin Nass , CFP ® , AEP ® , RICP ®
Your credit score is one of your most important assets .
It should be treated with care because it impacts your overall financial health . Your credit score influences how much money you ’ ll spend on interest and fees . A very good credit score will likely get you the best rates and terms for loans and credit cards . A lower score will likely cost you money with higher rates and might even prevent you from securing financing . Too often , people are unaware of the actions that might be unintentionally hurting their credit score . You might be sabotaging your credit score if any of the following actions apply :
Not paying attention to your credit balances . A good credit score is about more than paying your bills on time . Approximately 30 percent of your credit score is based on how much you owe or your amount of debt , which includes your credit utilization . According to Experian , credit utilization is the amount of revolving credit you ' re currently using divided by the total amount of revolving credit you have available . In other words , it ' s how much you currently owe divided by your credit limit . A low credit utilization rate — below 30 percent — shows you ' re using less of your available credit . Credit scoring models generally interpret this as an indication you ' re doing a good job managing credit by not overspending ; keeping your spending in check can help to increase your credit score . As your credit utilization goes up , you might begin to see your credit score drop because this might be an indicator to lenders that you are having difficulty managing your finances .
Closing accounts . Most of us close out credit cards when we pay them off thinking it is the right move . However , this can have a negative impact on your credit score . A paid-in-full credit card or credit line has a positive effect , even if you stop using the account . But if you close the account , your overall credit utilization increases , and your credit score can potentially decrease .
Co-signing loans . This might seem like a good way to help a family member or close friend obtain a loan . But most of us do not realize that the loan appears on your credit report until it is paid in full . And , if the borrower makes late payments ( or even worse defaults on the loan ), it will affect your credit score .
Applying for too many credit cards . If you have good credit , you probably receive a lot of pre-approved credit card offers with better rates and terms than the card you currently have . Don ’ t be tempted to apply for them all . This could hurt your credit score . Credit inquiries account for approximately 10 percent of your credit score . Although this is not a big factor , you should think about the impact before you take advantage of that next preapproval .
Not monitoring your credit scores . One of the best ways to determine if you are sabotaging your credit score is to monitor it . Credit scores can change as frequently as monthly , but you won ’ t know it unless you are regularly monitoring yours . If you see a significant drop in your credit score , it could indicate that your credit utilization is getting too high , you have an unsuspected late
14 CHURCH EXECUTIVE | MAR / APR 2022