On Monday, I wrote about 5 smart credit moves to make now. Today’s post is all about what not to do. The following tips sound smart, but can backfire if followed with abandon.
1. Asking for a lower rate on your credit card. Starting Aug. 22, 2010, new rules will require issuers to review interest rate increases every six months and reduce the interest rate 45 days after the review “if appropriate.” Of course, you can still ask for a lower rate at any time, but understand that issuers can check your credit and ask questions about your financial situation.
As John Ulzheimer, president of consumer education at Credit.com, explains in my article on whether to ask for a lower interest rate, “They may make an adverse change to your account because of what they see on your credit report or something that you’ve told them.”
In other words, rejection is not the only negative outcome that could result. For example, you could see your credit limit lowered or your account closed based on information you give about your job or salary. At the very least, examine your credit record before making the call and have a back-up card. You can check your three credit reports for free, once every 12 months at AnnualCreditReport.com, and free credit scores at commercial websites such as Credit Karma and Quizzle.
2. Closing credit card accounts you’re not using. It makes perfect sense to simplify your life by having fewer accounts, but your credit score won’t reward you for reducing your access to credit.
It won’t shorten your credit history right away, as some articles suggest. Closed accounts with perfect payment histories will sit on your credit report for up to 10 years. Where closed accounts can penalize the score is in the “amounts owed” category, which is worth about 30 percent of a FICO score. Your debt-to-credit limit ratio plays an important role in this category. The closure of an account with a zero balance reduces your available credit, which can raise your debt-to-limit ratio.
What to do: If you need to close an account but don’t want to penalize your score, reduce the balances on other accounts. If you always pay in full, this means charging less on your other credit cards. Better yet, leave the account open and tuck the card away in a sock drawer.
3. Putting everything on your rewards credit cards. Sure, you can maximize your rewards points that way, but getting close to the limit can backfire, even if you pay the balance in full every month. Banks usually report the balance billed to you in your statement. If this amount is high in relation to the limit on the account, your debt-to-limit ratio could increase, which could hurt your credit score. A lower credit score could make it harder or more expensive to obtain loans, an apartment and even a new cell phone. It could also trigger credit limit reductions or an interest rate increase on new purchases.
What to do: Use your rewards cards, but don’t overspend. In addition to the risk of getting into too much debt, a sudden surge in spending could trigger adverse actions on your account and reduce your credit score. A good rule of thumb: Use no more than 30 percent of your credit limit. Spend less than 10 percent if you want to maximize your score.
Know any other dubious credit moves?
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