Americans know a fair amount about credit and credit scores. More than half understand, for example, that making payments on time, keeping credit card balances low or paid off, and not opening several cards at once can help raise a low score or maintain a high one, according to a recent survey.
People also know that credit scores are important. More than 80 percent of respondents knew that mortgage lenders and credit card issuers use them to evaluate applicants, and more than 50 percent also knew that landlords and cell phone companies take them into account.
That said, credit scoring formulas are complicated, and some of the nuances of how they work are mysterious. Here are five credit habits that seem positive at first glance, but on closer look could be causing you trouble.
Paying in Full…
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…if you think that undoes the damage of running up big bills.
To be clear: Paying in full is really the only smart way to use credit cards. You shouldn't carry balances or charge more than you can easily pay off each month.
But paying in full won't save you from the damage done to your credit scores when you've charged up a storm. That's because the balance reported to the credit bureaus — and used to create your scores — is often the balance from your last statement or from a random day of the month picked by your issuer. You can pay your balance the day after it's due, but the higher balance reported by the issuer is the one that matters.
Your credit utilization — how much of your available credit you're using — is one of the largest factors influencing your scores. Keeping it low throughout the month is important. Try to use less than 30 percent of your credit limit on any card, and keep usage below 10 percent if you're working to improve your scores.
Checking Your Credit Score…
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…if you're looking at only one score.
If you're at all savvy about credit, you know the act of checking your credit reports or scores won't hurt your numbers. But you may not understand how many scores are being used to judge you, which limits the value of seeing just one.
FICO is the leading credit scoring formula. Its creator, also called FICO, says it's used in more than 90 percent of credit-granting decisions. But there are many different FICOs. The most commonly used is the FICO 8, but many lenders use older versions of the score and some are testing the latest version, known as FICO 9.
There are also variations on each formula customized to different industries, such as auto lending and credit cards. While most FICOs are on a scale of 300 to 850 scale, the auto and bankcard scores are on a 250-to-900 scale.
All these scores also can vary based on which credit bureau supplies the credit report. The three credit bureaus (Experian, Equifax, and TransUnion) are private, competing businesses, so the information in your files is likely to be different at all three.
And FICO isn't the only formula being used. VantageScore, which the credit bureaus created to rival FICO, is gaining acceptance as well.
You can't predict which score a lender will use, so you may find it helpful to see a range of numbers that reflect your credit situation. To do that, you can buy a FICO 8 ($19.95) from one of the bureaus at MyFico.com, and the site will include five or six other FICOs commonly generated at that bureau.
You can check your VantageScore 3 for free at various sites. CreditSesame offers VantageScores drawn from TransUnion data, while MyBankrate and Quizzle distribute VantageScores using Equifax data. CreditKarma offers two VantageScores, one each from TransUnion and Equifax, and Credit.com offers VantageScores from Experian.
Putting a Fraud Alert on Your Credit Reports After a Breach…
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…instead of a security freeze.
Placing a fraud alert on your credit reports is a prudent move after a database breach exposes personal information such as your credit card numbers, address, or email. If the breach exposed your Social Security number — the key that unlocks your credit history — you need to consider something more drastic.
A security freeze, also known as a credit freeze, prevents new lenders (ones you don't already have a business relationship with) from seeing your credit report or score.That makes it harder for identity thieves to open new credit accounts.
Security freezes involve some hassle and cost. You may have to pay fees to freeze your credit reports and more fees to temporarily lift the freeze if you need to apply for credit, rent a new apartment, or get a new job. (Landlords and employers may also check your credit.)
Security freezes also don't protect you against all types of identity theft. A criminal could still take over your existing accounts, use your health insurance to get medical coverage, or steal your tax refund. But they typically make new account fraud — one of the most profitable types of identity theft — much harder to pull off.
Keeping Unused Accounts Open…
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…if your credit scores are high.
Yes, closing credit cards can hurt your scores. Shuttering an account typically reduces the amount of available credit you have, which in turn affects your overall credit utilization.
If your scores are good — say, FICOs in the 750 range and above — you shouldn't be afraid to close an unused account now and then, especially if you're tired of paying an annual fee on a card you no longer use or you're concerned an unmonitored account might be used for fraud.
Not Using Your Credit Card…
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…and using a debit card instead.
To have good credit scores, you need to have and use credit accounts. That doesn't mean you should carry balances, but you should use a card to reduce the chances the issuer will shut it down.
The bigger problem is that debit cards are a much less secure payment method because they give thieves a direct way into your bank account. Once the money is gone, you may have to fight to get it back.
And if you don't report the fraud in time, you may be stuck with the loss. Federal law limits your liability to $50 if you report fraudulent charges within two days. Between two days and 60 days, your liability is $500. After that, it's unlimited.
