12 November 2008
By Patricia Kitchen
In the throes of tough economic times, consumers may spot seemingly wise approaches to their credit use. But experts say consumers should think twice about the impact on their credit scores, which help determine, among other things, interest rates on loans and credit cards.
Probably "the biggest no-no of all" for impacting a credit score is late payments, said Steven Katz, director of consumer education for TrueCredit.com, owned by TransUnion, one of the three credit reporting companies. But, depending on the individual circumstances, these apparently good ideas could also have negative effects:
Applying for multiple credit cards, to secure access to plenty of credit. That includes jumping at those 20-percent-off-if-you-sign-up-today-for-our-card offers. Why? Because each application means an inquiry into your credit worthiness, and too many inquiries in a short time could be perceived as a sign you're overextending yourself, said Roslyn Whitehurst, spokeswoman for Experian, another credit reporting company. Katz said too many such queries could make you look "credit hungry." Still, if you haven't applied for credit in some time and are faced with 20 percent savings on a big-ticket item, saying yes could be prudent.
Taking advantage of deals touting nothing down, zero percent interest, no payment for 12 months. Those pitches may not sound like an extension of credit, but in fact, you are incurring more outstanding debt, said Ray Mignone, a fee-based financial planner in Little Neck. And, said Katz, this results in yet another inquiry as to your creditworthiness.
Closing little-used credit card accounts so you won't be tempted to use them. This can be problematic because you are, in effect, lessening the amount of credit available to you, Whitehurst said. And the algorithms used to determine credit scores like to see a "cushion" between what you owe and what you can still borrow. Also, said Katz, when you close an account that you've paid on a timely basis, "you're eliminating a positive item in your credit history that may have been serving you well."
Maxing out on your home equity line of credit without a clear need. Several clients, nervous their banks may cut the lines of credit, have thought of taking this approach, said Michael Kresh, a financial planner in Islandia. But, remember, said Katz, this also affects your "utilization" ratio of debt to available credit.
Maxing out is not necessarily a bad thing, said Kresh, if you have a clear need, such as college tuition or predictable business expenses. But you are susceptible to two strikes if you do this "for the heck of it" -- one, the impact to your credit score and, two, the possibility you'll blow the money on something you don't really need.