If you’re saving money, being too thrifty can hurt you
A lot of people are being tight with their money right now, saving in the wake of uncertainty in the oil and gas industry, economy and even the housing market to some extent. Homeownership is still an affordable option right now, and saving some extra money will come in handy when it comes time to apply for a mortgage. While tightening the purse strings can save you money and is good practice, neglecting your credit cards can actually do more harm than good in some cases.
A common misconception by savers is that they should pay off their credit cards and leave them aside if they are trying to maintain or improve their credit rating, this is actually not the case. In some instances, credit card companies will actually close accounts that aren’t being used. And as a general rule of thumb, you need to use credit to build credit. That still means being responsible with your credit cards, so here’s some guidelines:
- Use your credit cards: this may seem like odd advice, but just leaving your credit cards stagnant won’t actually help your credit score. Using your cards, and paying them off quickly, will help improve your rating.
- Pay your lowest balance cards first: feeling overwhelmed with repayment can make getting out of debt seem impossible. By starting with your lowest-owing card, you’ll get yourself on track to repayments and better credit.
- Don’t close cards once they’re paid off: 15% of your credit score is determined by the amount of time you’ve had credit.
Say you have a combined $10,000 credit limit over two cards, and your balance is $1,000, which means you are using 10 percent of your credit. If you cancel one of those cards and your limit is now $5,000, you are suddenly using 20% of your credit, which will bring down your credit score. [Huffington Post]
- Don’t max out your credit cards: keep your cards to a maximum of 75% of the credit limit.
- Don’t pay off debts with other debts: paying off your credit card with lines of credit or secured loans, is just counter-active. You’re essentially converting unsecured debt into secured debt, but it’s all still debt.
If you’re looking for more information on credit cards and credit scores, there’s some more information on my blog or my website here.
