5 Surprisingly Bad Credit Habits You Should Break Now

Most consumers know that one of the best ways to maintain a solid credit score is to pay off debt responsibly and on time. That's a good start. But it may surprise you to learn that some of your best efforts to enhance your score are actually accomplishing just the opposite.

Here are five common mistakes borrowers make:

1. Paying cash for everything. Some consumers figure that the only way they can keep from abusing credit cards is to avoid them completely; or they assume that by paying cash for everything, they're demonstrating to lenders (should they ever need a loan) that they're responsible and live within their means. Or perhaps a borrower got in debt over his head at some time in the past, and after recovering from that experience, resolves to avoid a repeat performance by washing his hands of credit altogether.

When it comes to preserving your credit rating, paying cash is not the best strategy because if, in the future, you want to obtain financing for a home or car, lenders will check your credit and find it to be a blank slate. To demonstrate your creditworthiness, you need to show you can handle credit responsibly, not shy away from it completely. Credit is a tool you need to learn to use with good judgment and maturity.
2. Closing multiple credit card accounts. Similar to the extreme response of avoiding credit completely is the reaction by some borrowers, particularly those who experienced credit problems in the past, to overreact by closing all credit card accounts. This may be the best choice if you truly can't restrain yourself from using plastic excessively, but for most consumers, it's advisable to keep one or two credit accounts open, especially those accounts you've held the longest. Hold onto one or two of your oldest cards, and use them sparingly to ensure you don't get charged inactivity fees; ditch the rest if you find that possessing them is just too tempting.
3. Making a habit of moving revolving debt around from one card to another. It's better to pay down your debt rather than stave off the hard work by shifting credit card debt from one card to another. It's fine to take advantage of an introductory low rate card, but only if you can pay it off before the rate ratchets up. Given the same amount of debt, your credit score could be higher if you have it spread among more accounts rather than just a few, because your credit utilization ratio, the amount of your available credit you're using, will be lower.
4. Conducting a leisurely home loan search. When you prepare to buy a home, you'll likely shop around for the best mortgage at different banks or credit unions. You may also want to be pre-approved for a loan. That's a good idea, but if you don't want to damage your credit score, be sure to do your rate shopping for a home or car loan within a fairly condensed period of time.

Why? Because if you spread out your search for the best loan over a period of several months, or even stop and start your home and home loan search due to personal circumstances or market conditions, credit reporting bureaus may interpret multiple credit inquiries by home loan or auto loan lenders as multiple applications for credit, rather than one; this could hurt your score. But as long as inquiries from auto or home loan lenders occur within a fairly condensed period of time, which would indicate to the credit bureaus that you're only looking for one loan, it should have little impact on your credit score.

Different lenders may rely on the old or new FICO scoring formula, the older version groups together all inquiries falling within a 14-day window, while the new scoring formula lumps all inquiries falling within a 45-day span as a single inquiry. To play it safe and ensure that your loan-shopping isn't hurting your credit score, try to wrap up your rate shopping for any kind of loan within a period of two weeks.
5. Closing a credit card that still has a balance. This is another common mistake borrowers make in penance for past credit mistakes. When you close a credit card that still has a balance, you decrease your available credit to $0. The remaining balance will make it appear as if you've maxed out your card, which is never a good idea.

Sometimes, what may appear to be a prudent move in terms of debt management is actually detrimental to your credit, according to formulas used by the credit reporting bureaus. Being aware of how credit bureaus calculate your score can help you make wiser credit decisions.

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