Filed under: Credit, Credit Score
By Lindsay Konsko
If you're not careful, your favorite diversion could hurt your credit score. Below are four popular pastimes that could put your score in jeopardy if you make the wrong moves.
1. Traveling
Plotting where to go, finding the best deal on a flight and learning about the local culture of the destination you're headed to are all great ways to while away the hours after work.
Since payment history makes up 35 percent of your FICO credit score (the score most widely used in the United States), failing to pay your bills on time could cause it to drop substantially. To avoid this fate, it's wise to set up email or text reminders for your billing due dates so that you'll know when it's time to pay, no matter where you are in the world. You could also opt into automatic payments.
2. Shopping
Fashionistas agree: Shopping for a funky new outfit and then scoring a great deal on it provides a lot of satisfaction. And with online shopping, it's easy to engage with this hobby whenever the urge strikes.
But this can be a blessing and a curse when it comes to your credit. Thirty percent of your FICO score is determined by amounts owed, and your credit utilization heavily influences this category. Your utilization is calculated by dividing the outstanding balance on your cards by the total amount of credit you have available. Most personal finance experts recommend keeping it below 30 percent.
If you're doing so much shopping with your credit cards that your credit utilization ratio meets or exceeds this threshold at any point during the month, your credit score could take a hit. Your best bet is to monitor your balance carefully and make a payment if it's getting too high.
Another option is to spread your monthly spending between a few cards so that your utilization on each one stays low. Pay them all off in full by their billing due dates to avoid interest charges.
3. Reading
Getting lost in a good book is a popular pastime for many. And if you're in the habit of borrowing your weekly read from the local library, good for you - you're saving a bundle on book purchases.
Just be sure to return your books on time. It has become common for libraries to turn large, unpaid overdue fees over to collections agencies. If this happens, there's a good chance that the collector will report your lack of payment to the credit bureaus. (Most credit scoring models ignore collections accounts less than $10.) This will put a black mark on your credit report that could affect your credit score for up to seven years.
4. Gardening and Home Improvement
If working on your home or garden is your favorite way to relax, you're probably making frequent trips to major home improvement warehouse stores. If so, you might have considered applying for the retail credit cards offered by these big-box merchants. While in some cases it might make sense to do so, it's a bad idea to finance a big project by opening several cards at once - this could spell trouble for your credit.
Ten percent of your FICO score comes from new credit applications. Too many in the span of a few months is problematic because it's perceived as a signal you're in financial trouble. Waiting about six months between credit card applications is wise for most people. If your score isn't in good shape to begin with, you might be better off putting as much as a year between new requests. Follow this guideline to keep a kitchen remodel or a backyard overhaul from demolishing your credit.