When it comes to borrowing money, your credit score can make or break you. A high credit score can help you qualify for more favorable loan terms. And a low credit score can leave you with an expensive interest rate. Even if you have good credit, you’ll need to be careful. Here are three mistakes you should avoid making if you don’t want your credit score to fall.
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1. Borrowing More Than You Need
When you’re in the market for a new home or car, it’s a good idea to shop around for the best deal on a loan. Getting approved for a loan is easier when you have good credit. But it can be a double-edged sword if you take out a bigger loan than you intended to.
Let’s say you need a $250,000 home loan but you’re preapproved for a $300,000 mortgage. Having an extra $50,000 to work with could make buying a bigger, more expensive home tempting. But if you decide to get a larger loan, you’ll be taking on more risk. If you can’t keep up with your mortgage payments, your credit score could drop dramatically.
2. Churning Credit Cards Without Considering the Consequences
Credit card churning can be an effective way to reap major credit card rewards and bonuses. The premise is simple. You open new credit card accounts and spend a certain amount of money within a specific time frame to snag more points, miles or cash back.
But there’s an issue with credit card churning. Applying for new credit might shave a few points off your score. One hard inquiry shouldn’t tank your score. But opening multiple credit card accounts in a short span of time could have a significant impact on your credit score.
Another problem could arise if you’re ready to ditch most of the credit cards you needed to earn more rewards. Even if you pay off all your cards right away, you could put your credit score at risk if you close the new accounts almost as soon as you opened them.
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3. Always Carrying a Credit Card Balance
It’s a good idea to pay your credit card balances in full. Carrying a balance can hurt your credit score, particularly if you can’t make the minimum monthly payments.
The largest share of your FICO score – 35% – is based on your payment history. Even a single late payment could damage your credit score. So it’s best to pay your bills on time and get rid of as much debt as possible every month.
Of course, paying all your credit card bills on time might not make much of a difference if you’re constantly maxing out your cards. That’s because 30% of your FICO credit score depends on your debt-to-credit ratio and how much debt you owe.
Related Article: What Is a Credit Card Cash Advance?
Keeping your credit score from dropping isn’t always easy. That’s why it’s important to establish good financial habits. A single misstep that may seem harmless could wreak havoc on your credit score.
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