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What You Don't Know Can Hurt You: 3 Financial Mistakes that Lower Your Credit Score

Just about everyone understands if you pay your bills late or skip a payment all together, your credit score is going to be lower than someone who always pays everything before it's due. There are some other financial mistakes that may not be as well known, but that will also cause a lower credit score. When talking about your financial situation, what you don't know really can hurt you – here are 3 financial mistakes you need to avoid:

1. Shopping Around for Better Rates: What?! How can making sure you get the best interest rate possible on your financing be wrong? The problem with shopping around for financing is the number of times creditors access your credit report. Whenever you fill out an application for a credit cad or loan, you give the lender permission to pull your credit score. This is considered an inquiry, and it will show on your credit report for 24 months that the lender viewed your report in order to determine your eligibility for credit.

Credit scoring models use the number of inquiries when calculating your credit score. Statistically, people who have a lot of inquiries are more of a credit risk than someone with less inquiries. The more inquiries on your credit report, the more your credit score will drop.

2. Closing Credit Card Accounts: People who pay off their credit cards after having had credit card debt for awhile look forward to the moment that they can close their credit card accounts. It signifies a new phase in their financial futures – closing a credit card account proves you're committed to paying with cash and avoiding the burden of credit card debt, right? As counter-intuitive as it may seem, closing credit card accounts will often lower your credit score! Credit score calculation takes into consideration how much of your revolving credit limit you are using. If you have a credit card with a $5,000 limit and you are using $2,500 you are using 50% of your available credit. The amount of your available credit that you use is almost as important in the calculation of your credit score as making your payments on time – this is why you could have a mediocre credit score even if you are making all of your payments on time.

If you close a credit card account that is paid off or not being used, you remove some of your available credit. As soon as you reduce the amount of credit you have available to you, you increase the amount of credit you are using, even without spending more. As your utilization of available credit percentage increases, your credit score will decrease.

3. Leaving Inactive Cards Open Until They Fall Off Your Credit Report: So if you're not supposed to close credit card accounts, you should just leave the credit cards alone until they disappear off your credit report seven years after your last date of activity, right? Wrong! If after you pay off your credit card you leave the account open to avoid increasing your debt utilization percentage, the clock starts ticking. Most unused credit information will be removed from your credit report after 7 years. If your credit card shows a history of on-time payments, you don't want it to be removed from your credit report! Having a record of on-time payments is used in the calculation of your credit score, and is also used by lenders when determining your credit worthiness – so allowing an unused credit card with a good payment history to fall off your report is not a good idea.

Use your credit card once every couple of months to pay for dinner or an item that you will pay off in full as soon as the bill arrives. By making a purchase periodically (and not carrying a balance), the account will not be closed, your credit report will reflect the payment history and help you keep your credit score strong.


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