Your credit score can affect more than whether you qualify for a loan. It may also influence the interest rate you receive and how much borrowing costs over time.
But credit scores can be confusing. Does checking your own credit lower your score? Should you close a credit card after paying it off? Will carrying a balance help you build credit?
Let’s look at what really matters.
What helps your credit score?
Paying bills on time
Your payment history is one of the biggest factors affecting your credit score. Making loan and credit card payments on time shows lenders that you can manage debt responsibly.
If remembering due dates is difficult, consider setting up automatic payments or account alerts. Even if you can only make the minimum payment, paying it by the due date can help protect your credit history.
Keeping credit card balances manageable
Credit scoring models consider your credit utilization, which is the percentage of your available revolving credit you are using.
For example, if your credit card has a $1,000 limit and the reported balance is $900, your utilization on that card is 90%. A commonly used guideline is to keep credit utilization below 30%, although lower is generally better. On a card with a $1,000 limit, that would mean keeping the reported balance below $300.
The 30% guideline is not a guarantee or a point at which your score suddenly changes. It is simply a helpful target. Paying balances down and avoiding maxed-out cards may help your credit over time.
Think before closing an older credit card
Paying off a credit card is a great step, but closing the account may not help your credit score.
When you close a card, you lose that available credit. This can make it look like you are using more of the credit available to you, especially if you still carry balances on other cards.
That does not mean you should never close a credit card. Closing one may make sense if it charges an annual fee or makes it too tempting to spend. Before you do, consider paying down your other credit card balances and asking your card issuer whether there is an option without an annual fee.
Reviewing your credit reports
Mistakes on a credit report can happen. An account you do not recognize, an incorrect balance or a payment mistakenly reported as late could affect your credit.
Reviewing your own credit report does not hurt your score. You can request free reports from each of the three major credit reporting companies at AnnualCreditReport.com. If you find an error, follow the instructions provided to dispute it.
What can hurt your credit score?
Missing or making late payments
A missed payment can remain on your credit report for years. If you are struggling to make a payment, contact the lender before the due date. There may be options available, and asking for help early is usually better than waiting until the account is past due.
Carrying high credit card balances
High credit card balances can affect your score even when you make every payment on time. Paying balances down and limiting new charges can help reduce the amount of available credit you are using.
It is also important to understand the difference between avoiding a late payment and avoiding interest. Paying at least the minimum by the due date keeps the payment from being considered late, but you generally need to pay the full statement balance by the due date to avoid interest on purchases.
If you pay only part of the statement balance, interest will usually be charged on the amount you carry into the next billing cycle. Missing the minimum payment may also lead to a late fee, possible damage to your credit and potentially a higher interest rate.
Applying for several accounts at once
When you apply for a loan or credit card, the lender will generally check your credit. This is called a hard inquiry, and it can affect your score.
There is not one universal rule for how many applications are too many. A good guideline is to avoid applying for several unrelated credit accounts within a short period, especially before applying for a major loan such as a mortgage.
Shopping for rates on the same type of loan is different. Multiple inquiries for an auto loan, mortgage or student loan made within a focused shopping period are generally treated as one inquiry by common scoring models. Credit card applications are usually considered separately.
Apply for new credit when it supports a real financial need, and compare your options before submitting multiple applications.
Ignoring accounts in collections
Ignoring a collection account will not make it disappear. If a debt collector contacts you, begin by confirming that the collector is legitimate and that the debt belongs to you. Review the creditor’s name, the amount owed and the information explaining how to dispute the debt.
If the debt is incorrect, has already been paid or does not belong to you, dispute it in writing and keep copies of any documents you send.
If the debt is valid, contact the collector to discuss realistic options. You may be able to arrange a payment plan or negotiate a settlement. Get the terms of any agreement in writing before sending payment, and do not agree to an amount you cannot afford.
Paying a collection does not guarantee that it will immediately disappear from your credit report or increase your score, but resolving a valid debt can prevent the situation from continuing and help you move forward financially.
Common credit-score myths
Checking your own credit will hurt your score.
Checking your own credit report does not lower your credit score.
You need to carry a credit card balance to build credit.
You do not need to pay interest or carry a balance from month to month to build a positive payment history. Paying the full statement balance on time can help you avoid interest while still showing responsible credit use.
Closing a credit card always improves your score.
Closing a card reduces the amount of credit available to you. If you carry balances on other cards, that could increase your credit utilization and affect your score.
Your income is included in your credit score.
Your income may be considered when you apply for a loan, but it is not used to calculate your credit score.
Improving your credit takes time
There is no overnight fix for a credit score. The most effective approach is usually the least flashy: pay on time, keep balances manageable, apply for new credit thoughtfully and check your credit reports for errors.
If you have little credit history or are working to rebuild it, Cotton Belt Federal Credit Union may be able to help. Our Credit Builder Loan uses your savings as collateral while allowing your savings to continue earning interest. As you make steady, on-time monthly payments, you can begin building a positive credit history.
Ready to take the next step? Learn more about Cotton Belt’s Credit Builder Loan.
