Nikita Chheda is a senior product manager at LendingTree focused on improving the credit card experience for consumers. She doesn’t just make applying for credit cards easier. She also works to improve our app to help people avoid common credit mistakes, including some she’s made herself.
Don’t miss a single payment
A year ago, before my wedding, I forgot to pay off a $100 balance on my credit card. I was already 30 days late. While vacationing in India, I forgot to make the payment for a second month. My credit card went into delinquency because my payment was 60 days late and my credit score dropped 120 points, from 750 to 630.
I had to pay the $100, plus $100 in interest. Since then, I’ve been making on-time payments, but I’ve not been able to increase my credit score by the 120 points I lost. It took just two months to drop my score by that much and it’s taken me almost a year to get back to where I was.
Payment history is the most important part of your credit score. Missing just one payment can damage your score severely. I’ve made sure that I don’t miss any more payments and my credit score is improving.
That experience motivated me to recommend certain features in our app, such as credit alerts and emails that remind users to make payments on time. We inform customers of the negative impact derogatory marks can have on their credit report. On our My LendingTree dashboard, we recommend balance transfer credit cards, credit services and debt relief options if we see a user has started missing payments.
Consider 70% your sweet spot
If you carry high balances on your credit card month to month or have a habit of using your entire credit limit, pay at least 70% of that balance before your next bill is due. Lenders and card issuers want to see that your utilization is below 30% — anything higher sends the message that you’re using too much credit in relation to your total available credit. That doesn’t bode well for your credit score. It could be very dangerous, and you could take a hit on your credit score.
Pay more than your minimum balance
Making minimum monthly payments are good so you don’t incur late fees. But if you only make the minimum payment, you will incur the bank’s variable interest rate, which could be anywhere between 15% to 25%. That kind of interest tacked onto a high balance can trap you in a cycle of debt that’s very difficult to escape. As often as you can, pay back more than the minimum payment so you avoid costly interest.
Credit card companies love cardholders who only make minimum monthly payments. That’s because they can make money off the interest. Excellent users are people with a 750-credit score or higher. Credit card companies rarely make money off them, because they don’t tend to carry high balances month to month. That’s why excellent users can qualify for rewards cards that may come with higher annual fees.
Always keep your cards active
If you have a credit card you don’t want to use anymore, don’t close it. The average age of your credit is a crucial component of your credit score; the longer your accounts stay open, the better your score.
Even if you don’t need the card anymore, still use it, even if it’s for something small, like a soda or gas. If you (or the bank) closes the card, your utilization could go up on other credit cards you use because your total credit limit is down.
Be careful with store credit cards
Store credit cards can damage your credit, if you’re not careful. Each time you apply for one, it’s considered a hard pull on your credit report.
A friend of mine went on a shopping spree at three different department stores, applying for credit cards at each one. Her credit score dropped 30 points.
Retailers may offer discounts as incentives for signing up for their credit cards, but make sure the money off your purchase is worth it. A hard pull is not worth saving $20 off your merchandise.
Explore credit consolidation
If you carry high balances month-to-month and incur a lot of interest, you may want to consider consolidating your debt with a balance transfer credit card.
These cards let you move your high-interest debt onto a credit card with a low or no introductory rate period, usually 18 to 24 months. That gives you time to pay off your debt without incurring the interest.
But to make the most of your debt transfer without paying interest, LendingTree recommends you pay at least 5% of the total debt on the card as part of your minimum monthly payment. That means if you transfer $5,000, you’ll have to pay at least $250 per month so that you can pay off your revolving balance in a shorter period of time.
Use big purchases to your advantage
Let’s say you incur higher-than-normal debt on your credit card in a given month, but you regularly make payments. Even if the debt is too big to pay off at once, make minimum payments so you don’t incur late fees. If you still carry a substantial amount of debt the next month, pay off your balance completely.