Personal finance journalist with an eye for industry news
Credit cards can nourish your credit score if you use them responsibly, but your score can end up on life support if you make critical card mistakes.
We all know that it’s all too easy to mess up your credit score by mishandling your credit card, and the most surefire way to do that is to miss a payment. Payment history counts for 35 percent of your score under FICO’s traditional model, and a 30-day delinquency can reduce your score by as many as 110 points.
“Don’t pay that card on time, and it’s going to destroy your credit score,” said Rod Griffin, director of public education at the credit bureau Experian. “Late payments are by far the worst thing you can do.”
Maxing out a card is another score killer, potentially costing you 45 points. Credit utilization makes up 30 percent of your credit score, and using all the credit you have available also costs your score valuable points.
Misusing credit cards can also affect your score under the remaining FICO score components – length of credit history, credit mix and new credit – albeit to a lesser extent. For instance, if you apply for too many cards within a short time frame, it could reduce the average age of all your accounts and give lenders the impression you’re on a credit binge, as well as knock your score down with all those hard inquiries.
But there are other less-obvious card missteps that can do serious damage. It’s critical to be aware of them to avoid inadvertently killing your credit score. Here are five.
1. Paying less than the minimum payment
A typical credit card minimum payment is typically all fees and interest due that month, plus 1 percent of the balance. While you may think paying something rather than nothing will keep you out of trouble, paying less than the minimum required payment is just as bad as not paying the bill at all.
“If you do not pay at least the minimum amount due, it’s considered late,” Griffin said. “A late payment stays on your credit report seven years from the original delinquency, so you’re going to hurt your credit history for at least that amount of time if you don’t pay the minimum amount due.”
What to do instead: If you are experiencing financial hardship, call your issuer as soon as you realize you will not be able to make the minimum payment. Some issuers will allow you to skip a payment, reduce or postpone interest charges or enter you into a hardship program. If your situation continues to worsen, it’s best to seek the help of a nonprofit credit counseling agency (affiliated with the National Foundation for Credit Counseling or the Financial Counseling Association of America), which will contact your creditors to work out a payment plan.
2. Withholding payments while in a dispute with your issuer or a merchant
Let’s say your card was erroneously charged for an item you didn’t buy, or you bought something online that never arrived, and your issuer hasn’t resolved the matter. Can you withhold any payments on your outstanding balance until the issuer reverses the charge? Not without damaging your credit.
Under the Fair Credit Billing Act, you don’t have to pay the amount in dispute, but you still must pay the minimum required on your billing statement. Don’t lose your nerve if the card issuer seems slow to respond – it must investigate or resolve the issue within 90 days or two billing cycles (whichever comes first).
What to do instead: Pay at least the minimum payment. “You have to honor your credit card agreement, which requires you to make payments,” said Bruce McClary, vice president of communications at the National Foundation for Credit Counseling. “Otherwise, the issuer is going to report to the credit bureaus that you’re not honoring the obligation to pay on time, which will hurt your credit score.”
3. Closing a card with a high credit limit
If you’ve grown tired of shelling out extra money to pay a high annual fee on a card – or you just don’t want the card anymore – it can be tempting to close it. But closing any card can hurt your credit score by reducing your overall credit utilization ratio. And the higher the credit limit on the card you close, the bigger the impact to your debt-to-limit ratio.
“When you close that account, the total of the balances on all your other cards are a higher percentage of your available credit limit,” Griffin said. “An increase in your utilization rate is a sign of risk and it will cause your scores to drop.”
What to do instead: If you’re thinking of closing a card because of high fees, ask your issuer if you can switch to a different card that’s less expensive or has no annual fee. Changing cards often has no impact to your score – issuers typically consider it to be the same account, so there might not be a need for a hard inquiry, and you should be able to retain the same credit limit.
4. Sharing a card account with an overspender
Adding someone as an authorized user on your credit card account is a great way to help them build credit, provided your account is in good standing. But it can ruin your credit if the authorized user takes advantage of the “piggyback ride” and overspends with your card. If you don’t monitor the other person’s spending, you could soon find yourself with a maxed-out card.
Authorized users can also have their credit gashed by primary account holders who charge too much or miss payments, but the damage is easier to reverse. David Hosterman, a loan specialist at Castle & Cooke Mortgage in Greenwood Village, Colorado, said loan applicants often appear as bigger credit risks than they really are because they’re authorized users on the accounts of other people who overspend.
“That can negatively affect a consumer’s debt-to-income ratio and their credit score,” he said. “But getting removed as an authorized user can allow a consumer to qualify.”
What to do instead: An authorized user or the primary account holder can contact the card issuer and request the authorized user be removed from the account. The history of that account would then be erased from the authorized user’s credit report within one or two billing cycles. (Be aware that having no credit accounts will keep you from getting a credit score. Consider applying for your own card if you’re about to be removed from someone else’s account.) Some issuers allow you to set a charging limit on an authorized user account, or you could choose not to give the authorized user a card, but only lend your credit history instead.
5. Using a balance transfer card for additional spending
A card with a lengthy interest-free period for balance transfers can help you save money while paying off a large debt incurred on another, higher-interest card. A balance transfer card also can boost your credit score by increasing your available credit. But if you begin using your new card for purchases before paying off the transferred balance, you could be headed for trouble.
Balance transfer card promotional deals generally have two APRs – one for the amount transferred and one for new purchases. Even if both introductory APRs are 0 percent, racking up too much debt on top of the transferred balance will eventually lead to interest charges – exactly what you were trying to avoid.
“Introductory offers on transfers will expire after a certain time,” McClary said. “The remaining balance at that point is charged at whatever the full interest rate might be.”
What to do instead: Refrain from using your balance transfer card for new purchases. Stick to a serious repayment plan. If you must charge something, it’s better to use a card with the lowest APR and pay it off quickly. Stacking hefty interest payments and other purchases on top of a transferred balance can put you at risk of missing payments.
Nobody’s perfect – but try to be if you use cards
Everyone makes mistakes, but using cards unwisely can prevent you from securing loans or getting the best terms on insurance or even other cards you may want in the future. When used responsibly, they can help you manage your finances and save money through rewards, cash back and other perks.
By consistently making your payments on time, keeping your balances as low as possible and not applying for lots of new cards in a short time period, you can achieve a high credit score with a long lifespan.