As part of the home buying process, you may learn a lot about your credit score. There are obvious things that hurt your credit score, such as not paying your minimum credit card payment or having debt go to collections, but there are some other, not so obvious things that you may be doing monthly that can affect your score in a negative way.
- 70% Rule: There is a rule in the credit world that deals with "credit utilization". If you are using 70% or more of your available credit and carrying that balance each month, the creditor feels that you are dependent on credit and this will decrease your score. A great example in the real estate realm is using lines of credit for downpayments on rental properties. If that line of credit is maxed out and you are carrying that balance each month and making interest only payments, this is not a good practice. Also note that if you pay off your balance in full each month, this rule doesn't apply. This is only for those who carry the balance month to month.
- Shopping around for loans: If you're considering a loan and want to shop around for rates, that is a great idea, BUT don't authorize each lender to pull your credit. This can result in a 'hard hit' on your credit report, which results in a decrease in your score.
- Inactive cards: This one may not necessarily hurt your credit score, but it's definitely not helping. It will actually build your credit a great deal more by using the card once or twice a month then paying the balance off in full, than to let it sit inactive.
- Shutting down a credit card: Now that I've told you an inactive card is not great for your credit, maybe you're thinking about cancelling the card? Don't do it! Even if the card was used very little, it is a window to your credit history. If you cancel the card, essentially the history goes with it!
Credit cards are a great tool if used responsibly. My best tip is to have your bank set up your credit card so the balance automatically pays off the balance on the due date. That way you will never be charged interest! Just remember to not overspend!