Money Girl

7 credit mistakes that could cost you

Episode Summary

Many credit mistakes and misunderstandings can end up costing you.

Episode Notes

Building and maintaining great credit is a critical part of your financial life. Be aware of seven credit mistakes and misunderstandings that can hurt your wallet.

Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.

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Episode Transcription

You probably know that building and maintaining great credit is essential to your financial life. It allows you to save money by borrowing at competitive interest rates and paying less interest on credit cards and loans. 

Additionally, having good credit improves your finances in some surprising ways, such as paying less for auto and home insurance (in most states), getting approved for a lease, impressing potential employers who review credit, paying low or no security deposits for utilities and cell phones, and getting money-saving promotional offers.

Unfortunately, many credit mistakes and misunderstandings end up costing you. This show will cover seven that hurt your wallet instead of helping it.

Hi, everyone! My name is Laura Adams, and I want to thank you for tuning in this week. I'm an award-winning personal finance author and have hosted the Money Girl podcast since 2008. I also partner with select brands for PR and marketing work as an on-camera spokesperson, consumer advocate, voice-over talent, and multimedia creator.

Here on Money Girl, my mission is to help you get the knowledge and motivation to prioritize your finances, build wealth, and have more security and less stress. Every episode is a mini-money training designed to help you take your financial life to the next level. I might answer a listener's question, talk about something going on in the financial news, or interview a guest who’s a subject-matter expert. So, if you like what you’re hearing, be sure to subscribe so you automatically get each weekly episode.

And thank you if you're already a long-time listener! If you're enjoying the show or have a personal finance or small business question, you can leave a message 24/7 at 302-364-0308. You're also free to shoot me an email using my contact page at

Today's episode is number 737, called 7 Credit Mistakes That Could Cost You. It was inspired by Jeff L., who says, "I've decided to leave my bank of some 44 years. What's the best way to transition to a new bank without causing damage to my credit?"

Thanks for your question, Jeff! As we cover various credit mistakes, I'll discuss what you need to know about closing a bank account. In fact, let's start there …

Credit mistake number one is not switching to a better bank.

Jeff, many people are just like you, wondering whether they should move to a different bank. I want to put your mind at ease because closing a bank checking or savings account doesn't have any direct effect on your credit. Banks and credit unions don't report your account information to the nationwide credit bureaus: Equifax, Experian, and TransUnion. 

While there is personal information in your credit reports, it's limited to your name, current and previous addresses, Social Security number, birth date, and public information, such as a bankruptcy. 

Your credit files never include your banking information, income, gender, race, marital status, religion, political party, or level of education. Federal law prohibits most demographic factors from getting factored into credit scores.

Your credit reports only show data from credit accounts. That's why using a debit card linked to your checking or savings never helps you build credit. 

However, let’s say you left a bank with a negative balance in your checking account. They would likely send it to a collection agency, which could report your outstanding debt to the credit bureaus, negatively impacting your credit. 

Also, note that having multiple overdrafts on your bank account may get reported to ChexSystems, making it challenging to open an account with a new bank. But again, that information never shows up on your credit reports.

So, Jeff, if you've found a better bank, don't be hesitant to change. An excellent way to ensure a smooth transition is to switch your deposits and payments to the new account while leaving some money in the old one for at least a few weeks. Once you're sure that you've made all the necessary changes, you can confidently close the old account.

The second common credit mistake is closing a credit card.

Closing a credit card or paying off a loan doesn't make it disappear from your credit reports. Information for an account with negative information stays on your credit report for seven years. And if the account shows positive data only, such as having only on-time payments, it stays in your credit file for ten years.

Closing a credit card that you've had for several years or with a high credit limit hurts your credit because it increases your credit utilization ratio, a significant scoring factor. It’s calculated by dividing your outstanding balance on each of your revolving credit accounts by your available credit limits. And it’s also calculated on the aggregate of your revolving accounts—those include credit cards and any lines of credit you may have. 

So, instead of canceling a card, I recommend that you keep it open and use it strategically for small purchases a few times a year that you pay off in full. That keeps the card active and you get the benefit of having more rather than less available credit to boost your credit scores.

Credit mistake number three is believing you must carry credit card debt.

While it's true that you must have credit accounts and use them to build credit, you never need to carry credit card debt to improve your credit. Using cards and paying them off every month is a wise strategy for avoiding interest charges and building credit simultaneously.

If you do need to carry a balance from month to month, you can also build a positive credit history if you send the minimum payment on time. Just be sure that you’re using the lowest interest card possible to reduce the monthly interest charge.

So, go ahead and use a credit card or two—just make sure you pay it off monthly. To learn more, listen to podcast number 660, How Many Credit Cards Should You Have for Good Credit.

The fourth error is relying on a spouse’s credit.

Your credit history and scores never merge with someone else's—even if you're married. That's why building your own credit as an individual is essential.

Also note that if you have a spouse with bad credit, that could affect your ability to get a joint loan or credit card, but it doesn't hurt your credit file. 

Credit mistake number five is not checking your credit reports periodically.

Many people are skittish about pulling their credit reports because they mistakenly think it will hurt their scores. Checking your own credit report is a "soft inquiry" that never counts against you, no matter how often you request it. 

However, "hard inquiries" made by lenders or credit card companies after you apply for a new account do ding your scores in the short term. So only apply for new credit accounts when you genuinely need them and space out those applications over time, such as no less than six months.

The bottom line is that you shouldn’t be shy about reviewing or downloading your credit reports at free sites like Credit Karma and Credit Sesame. Regularly checking them is the best way to catch any fraudulent activity and ensure you never become the victim of identity theft.

The sixth credit mistake is shopping for a loan too slowly.

As I mentioned, applying for new credit results in a "hard inquiry" on your credit reports, which temporarily dings your scores. It signals that you may take on new debt, representing a potential risk for creditors and merchants. 

However, most credit scoring models are sophisticated enough to recognize when you’re just comparing the best rates for an auto loan, mortgage, or any type of loan. Credit scores ignore multiple inquiries or count them as one inquiry when they occur within two or three weeks. 

So, don't hesitate to shop around for the best loan products with low rates and good overall terms. Just compare offers quickly so you don't risk getting more than one hard inquiry on your credit reports.

Credit mistake number seven is believing all payments help your credit.

Bills you pay to small companies or individuals, such as lawn care, pest control, or rent, typically don't appear on your credit reports. That's because credit bureaus have strict requirements for who can report consumer information to them, and in many cases, it's just not feasible for small businesses.

If a merchant doesn't report payment information to the credit bureaus, your payment history with that company can't affect your credit. However, if you don't pay a company and they turn your account over to a collection agency, in many cases, the agency will report your delinquency to the credit bureaus. 

I hope this show has helped you understand some primary factors that do and don't affect your credit. And thanks again to Jeff for sending in his question!

Before we go, I want to invite you to connect with me on Twitter @lauraadams or Instagram @lauradadams. And is my personal site where you can use my contact page and learn more about my work, books, and money courses.

That's all for now. I'll talk to you next week. Until then, here's to living a richer life.