Borrowing

These Well-Intentioned Credit Moves Aren't Doing Us Any Favors

Cathie Ericson

Remember when fat-free foods were all the rage—until we realized added sugar and sodium were doing the most damage? Or when we’d pull all-nighters before big project deadlines or exams, only to learn it’s sleep we need to sharpen our brains and make us effective?

It’s so easy to try to do the right thing, but inadvertently end up with bad results. That’s not just the case with diet and work habits, but credit, too. Take these four credit moves.

1. Applying for several accounts at once

No one wants to pay more interest than necessary, so it seems logical to apply for a few new cards and see which offers the best rate. Ironically, though, this can actually hurt our FICO scores. What??

“Any time your credit’s pulled, it counts as an ‘inquiry,’ which can have a slight negative effect on your score,” says Katie Bossler of credit counseling service GreenPath Financial Wellness. Not only can multiple “slight” dips add up, but when lenders see lots of new applications at one time, they start to worry we’re in a cash crunch and may not be able to pay back balances.

Fortunately, we can glean plenty of info about different cards without applying. Sites like Bankrate, CreditSesame and CreditCards.com compare annual fees, interest rates, sign-up perks and other stats.

2. Revolving a balance in order to build credit

There’s a common belief that carrying a balance, and making on-time payments, helps establish credit. One problem: It’s not true. And it can cost us. While on-time payments are important—accounting for 35 percent of a FICO score—we don’t have to carry debt to get credit for on-time payments.

3. Opting for a lower credit limit

“Choosing a lower limit can be tempting if you want to avoid overspending, but it can backfire if normal credit card use causes a high utilization rate,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling.

Credit utilization counts for 30 percent of our scores. Generally, we should keep the credit utilization ratio, or the amount we owe compared to our total credit limit, under 30 percent (though the lower the better).

So, asking for a lower limit can actually increase the ratio. On the flip side, one way to boost a score quickly is to ask for a credit limit increase we don’t actually plan to use.

4. Swearing off credit cards altogether

Sounds like a reasonable way to curb overspending. The only problem is that creditors sometimes close inactive accounts, which can hurt us since longevity makes up 15 percent of FICO scores.

A better idea, says Elaina Johannessen, program director at LSS Financial Counseling: Use a card for recurring payments, like a Netflix subscription or water bill. That way we’re maintaining activity without carrying the card in our wallet. (We just have to remember to pay it off.)

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