You have credit cards. You pay all your bills on time. You never go over your credit limit. You seemingly follow all the rules of responsible credit usage and yet you’re having trouble moving your credit score into that illustrious “excellent” category. What are you doing wrong?
Damaging your credit score is easier than you might think, particularly with all the misconceptions about credit floating around. The main problem is many of us don't know how our credit score is calculated and therefore have no idea what we’re doing wrong. Paying your bills on time is only a fraction of what makes up your credit score.
Before we can raise our credit score, we must first be aware of the following 5 things that can hurt our credit.
1. We avoid credit. Many people think that credit cards equal debt. Debt is bad, so credit cards must be bad too, right? Wrong. Having little or no credit can be detrimental to your credit score. The whole point of a credit score is to show that you know how to handle credit. If you don’t have credit history, lenders have no way of knowing if you can deal with debt. Debt is bad, but credit cards are not when used responsibly. Limiting your credit card spending to a small percentage of your credit limit and paying your cards off each month will help keep your credit score strong.
2. We close out credit cards or lower our credit limit. If you think lowering your credit limit or canceling that extra credit card is a good idea, think twice. While these actions may help ease the temptation to spend, they can also hurt your credit score. Here's how: One of the main factors of your credit score is your "credit utilization ratio," which measures your limit-to-balance ratio on your credit cards. As the ratio goes up, your credit score is likely to be negatively affected. Say your total credit limit is $5,000 and your total balance is $500. Your credit utilization ratio would be 10 percent. If you cut your credit limit to $2,500, but your balance remains $500, your ratio is now 20 percent. A higher credit utilization ratio is considered a negative factor because it means that you are using more of your credit limit.