If you’ve recently been turned down for a loan or stuck with an interest rate that’s not right for you, it might be time to take a closer look at your credit score. And if that number needs work, it’s worth doing what you can to increase it.
But some of the things you might think will help you raise your credit score could actually end up driving your score down. Here are some pitfalls to avoid in this regard.
1. Carry a credit card balance because you think it will help
Some people end up with a balance on their credit card because they run into unexpected bills they don’t have money for, or because they lose their job and have to put food on the table. . But don’t specifically carry a credit card balance just so you can pay it off and establish a payment history.
Charging expenses to a credit card and paying your bills in full each month could help improve your score. But intentionally carrying a balance could do the opposite – hurt your credit score if that balance gets too high.
2. Pay off a large installment loan
If you owe money on an existing loan and have the money to pay it back, this could pay off. But don’t assume that this will result in an instant increase in credit rating. Quite the contrary – even if you think eliminating a loan would result in a higher credit score, sometimes that won’t happen if missing that loan leaves you with a less favorable credit mix.
Part of what goes into your credit score is the types of different accounts you have open. It is generally considered a good thing to have a combination of credit cards and installment loans. If you’re paying off an installment loan, like a car loan, so all you’re left with is credit card debt, it could actually lower your score.
3. Close an old credit card
You might assume that closing an old credit card that you don’t use often will improve your credit score because it shows that you are able to live with less credit. But unfortunately, the opposite could happen.
The length of your credit history is an important factor that goes into calculating your credit score. If you close a long-standing account, it could hurt your credit score rather than help it.
Your credit utilization ratio is another important factor that determines your score. This ratio measures the amount of credit card debt you have relative to your total credit limit, and the lower the better. If you close a credit card, you reduce your total credit limit. This could increase your utilization rate, leading to an even bigger drop in your credit score.
Take the right approach
Raising your credit score could do wonders for you. Just make sure you’re going about it the right way.
While the tactics above can backfire, some solid ways to boost your credit include paying all your incoming bills on time, eliminating some existing credit card debt, and correcting errors on your credit report. . If you want to boost your credit score, you may find that you are able to open up a world of affordable borrowing opportunities.
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