With so much talk about your credit score, it can be difficult to know when the advice you’re getting is good or bad. Here are a few of the most common inaccurate credit suggestions and why they’re a bad idea.
Dispute all negative actions
Many credit repair organizations promise that you can improve your score by contesting negative actions like late payments or loan defaults, even when they’re accurate. The logic goes something like the following: if you dispute a negative action, the credit bureau has 30 days to investigate and respond—if they don’t, they have to remove the negative action and by bombarding them with challenges, they’re bound to miss some and have to take them off your file. Bad advice. First, it’s dishonest and illegal; and second, credit bureaus can continue to investigate the claim and reinstate the negative action after it’s been removed. While you definitely should dispute inaccuracies on your file, don’t dispute everything just because it’s negative.
Close your accounts when you pay them off
If you’re struggling with debt, closing your accounts can be a satisfying way of putting that debt behind you. However, this short-term gratification can hurt you in the long run. Nearly one-third of your credit score is based on your credit utilization, or the sum of your current revolving balances divided by the sum of your credit limits on these accounts. If you have $2,000 of credit card debt and a total credit line of $10,000, you have a credit utilization of 20% (less than 20% utilization is good and less than 10% is ideal). However, if you close a credit card with a $5,000 limit, you’ve reduced your total credit limit to $5,000 and increased your utilization from 20% to 40%. This can lower your credit score by 30-50 points, depending on your overall credit profile.
Lower utilization by opening new cards
Following the same logic, some experts suggest that you can lower your credit utilization (and increase your score) by opening new accounts to increase your credit line. If you have $2,000 in balances and $10,000 credit limit but open accounts with an additional $10,000 of credit limits, you will drop your credit utilization from 20% to 10%. It sounds great, but it’s bad advice. First, your credit will take a short-term hit because credit scoring models look at new inquiries negatively. More importantly, people with credit problems often find it hard to manage credit and adding new accounts just increases the temptation and it results in more overall credit card debt.
Remember: successful credit management usually has more to do with common sense than fancy techniques. To really maximize your credit focus on these simple steps: consistently make on-time payments, pay off your revolving credit, and minimize new credit inquiries.