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How do you find your credit score
10 things NOT to do when you apply for a credit card
by Cynthia Drake
December 15, 2017
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What you should not do may not be as obvious.
We consulted lenders and financial counselors to learn 10 things not to do when applying for a new line of credit. We added a credit damage gauge, which shows how much each mistake may hurt your application for new credit and your score in the future.
10 things not to do before applying for a credit card (and how it will affect your credit score)
1. Let your credit score slip.
The better your credit score, the better the card you can get. If you have excellent credit, you have your pick of cards. Big sign-up bonus? It’s yours for the asking. Want a balance transfer? No problem. Low interest rate? You got it.
To find out where you stand, you have several choices. An increasing number of credit card issuers give out credit scores for free. With Discover Scorecard, anyone – you don’t have to be a Discover customer – can get his or her FICO score for free. Or you can register with CreditCards.com to gain free access to your VantageScore, which is the other big credit scoring company.
2. Apply for a lot of credit cards or loans.
Why it hurts you: Maybe you’re interested in shopping around for the best deal and want to see who will approve you for a card. But think twice before going on a mass application spree. An analysis of your new credit makes up 10 percent of your score, and multiple credit inquiries drag down that score.
“You don’t want to go out and apply for a bunch of different accounts,” said Bruce McClary, vice president of public relations and external affairs for the National Foundation for Credit Counseling and a former consumer credit counselor. “It may send a couple of messages. First, it tells the lender that you went to a bunch of places and got denied for some reason. Or the possibility exists that you opened an account in each of those places,” which can signal financial problems.
Each time you apply for credit, a hard inquiry is generated on your credit report when a lender checks to see if you are creditworthy. Each hard inquiry drags down your score. The effects are minor – usually, three to five points. Paying on time with a new card quickly erases the damage. But when you apply for multiple cards at once, lenders view this as risky behavior.
So apply for new credit cards strategically. If you get rejected once, figure out why before you apply again. If you have mediocre credit and have your heart set on a high-end card, it’s not going to happen. Either settle for the card that fits your credit standing, or work to improve your credit so you do qualify.
3. Use too much credit.
“For any existing credit cards you have, you want to minimize percentage utilization and maximize credit available,” said Kevin Gallegos, vice president of new client enrollment and Phoenix sales at Freedom Financial. “If you have a credit card with a limit of $10,000, and you owe $3,500 on it, that’s a 35 percent utilization.”
You often will read that using more than 30 percent of your credit is bad, and using less than 30 percent is good. That’s a myth. Credit utilization is a sliding scale, not a cliff. Just strive to keep balances down. The smaller your credit utilization, the better it is for your score. According to FICO, those with the best credit scores on average use less than 7 percent of their credit limits.
4. Miss payments.
Nichols started shopping around for other cards to transfer his balance and he came up short on offers. Not only did he have the late payment on his record, he also had a high balance and was starting to rack up multiple inquiries. He found he was limited only to cards with higher interest rates.
5. Have too many subprime loans on your report.
Why it hurts you: If there are too many subprime lenders represented in your credit mix, (which accounts for 10 percent of your score), it could cause credit card companies to think twice about giving you a card.
How much does this affect your credit? “It’s all about proportion,” McClary said. “If 90 percent of your creditors are prime creditors and you have this one subprime account, it’s going to be like a pebble in an ocean.” On the other hand, if you’ve got numerous high-interest accounts, that could potentially be a problem, he says.
6. Cancel other cards.
Why it hurts you: Canceling accounts in good standing with other companies can appear to shorten your length of credit history on your report (15 percent of your score) and can also reduce your total available credit, which could drive up your debt utilization ratio if you’re carrying big balances on other cards.
“Your debt ratio worsens when you shut down inactive accounts,” McClary said.
It might be a good idea to make a small purchase – a pack of gum or a cup of coffee, perhaps – on a card you don’t use much and then pay it off. That little activity could be enough to keep the card issuer from shutting your account down and damaging your credit.
7. Fail to check your credit report for errors.
Why it hurts you: Mistakes or fraud could be hurting your credit.
Still, you should be aware that your common name can make you more prone to mistaken identity when it comes to your credit report, which in turn could make it more difficult for you to secure a card. According to the Federal Trade Commission, 1 in 5 Americans have mistakes in their credit reports big enough to affect their credit scores.
If you suspect that the problem is more serious, for example, if another person is trying to steal your identity to open accounts in your name, you may want to consider installing a credit freeze. That prevents anyone – including you or someone pretending to be you – from opening new accounts in your name.
8. Avoid credit altogether.
“If you don’t borrow, they have no information to rely on. For those without any credit cards, a student loan or car loan helps build a credit history, as does paying every single bill on time and in full. That includes rent, phone, Internet and utility bills.”
9. Co-sign a loan for someone who is financially reckless.
By co-signing, you will be held responsible for loan repayment if the primary loan holder starts missing payments. And unless you and the person you co-signed for are communicating about the lapsed payments, you might not even know the loan is delinquent. Lenders won’t generally contact co-signers until the account is 90 days late, and by that time, a late payment (or two) may be already appearing on your credit report, which will hurt your score.
The solution is to make sure that when you co-sign for someone, the bills are mailed to you, so you can keep track of the person’s payments on the loan. Financial experts advise, however, that you avoid co-signing as a 2016 CreditCards.com poll revealed that 4 in 10 co-signers end up losing money and 28 percent suffered credit score damage.
10. Lie about your income.
Under federal law, card issuers must assess your ability to repay, and that means asking about your income. If you lie, the maximum penalty is severe – 30 years in prison. In reality, the most likely penalty for lying about your income is you’ll get a card you can’t handle and go deep into debt.
Federal regulations require issuers to weigh applicants’ abilities to repay what they borrow on their credit card, which means they’ll ask about your income. Inflating your income on a credit card application may seem like an easy way to boost your odds of approval, but it’s not worth the risk. If you bloat that number, you could get a card with a larger credit limit than you can handle.
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