Wednesday, February 25, 2009

Common Money Mistakes Part 1

By Kara Wahlgren

As the ongoing credit crunch forces lenders to tighten their wallets, your credit score has become more important than ever. In short, you currently need a stellar score to secure the lowest interest rates.

"Credit impacts every element of your life," says Adam Levin, co-founder and chairman of, a consumer advocacy website. "The stronger your credit, the easier it is to get the things you want."

So it's no surprise that consumers are looking for simple ways to boost their score -- but credit scoring can be counterintuitive, and some seemingly smart financial strategies can actually damage your score.

Read on:

1. Closing Your Old Accounts

After whittling your credit card balance down to zero, closing the account may seem like the responsible (and liberating!) next step. "I think anyone with common sense would view that as being financially prudent, especially if that line of credit is a source of temptation for you," says Curtis Arnold, founder of, a website that evaluates credit cards.

But Arnold warns that shutting down an account will affect two major components of your score -- your credit history and your utilization ratio, which weighs the amount of credit you have against the amount you’re using.

Instead of closing the account, set up the card to auto-pay one small bill (like your cell phone plan) and deduct the balance from your checking account each month. You won’t have to worry about maintaining the account, but you’ll reap the benefits of a low balance and a long-running history.

2. Putting Your Cards On Ice

Freezing your credit card or burying it in the backyard is such age-old advice, it’s practically a cliché. But letting your account go stale isn’t a smart solution. If your account goes dormant, the company may stop reporting it to the credit bureaus -- or they could shut it down completely.

Not only will your credit history be impacted, but an account that’s been closed by the creditor carries more stigma than an account that’s been closed by the consumer, according to Clarky Davis, the "Debt Diva" at CareOne Counseling, a credit counseling and debt management service in Columbia, MD. Again, the simplest solution is to set up an automatic monthly payment to keep the account active and maintain your credit history.

3. Going on a Credit Bender

Opening new credit card accounts may seem like a good way to rack up more available credit, but every time a potential lender looks at your credit score, it counts as an inquiry -- and stays on your report for two years.

Too many inquiries could hint that you're planning to open up several new lines of credit. "If you appear to be going on a credit binge, that will scare creditors," Levin says. But what if you're shopping around for a mortgage or car loan and simply want to find the best rate? No worries -- as long as you finish your applications within 30 days, your score won't be affected.



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