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Credit scores pose hidden dangers

by Peter Andrew
Credit scores pose hidden dangers

Let’s suppose you’re a careful and knowledgeable money manager. You are in the habit of paying off your card balances in full each month. If that describes you, there’s a good chance you use credit cards a lot. You probably recognize credit cards provide much better protections than debit cards, prepaid credit cards or cash. Oh, and credit card rewards are usually more generous than those paid on debit cards.

If you’re really smart, you may put nearly all your spending, including big purchases, on the credit card with the best rewards program. Why wouldn’t you maximize your travel points, cash back or other freebies? Go ahead and pat yourself on the back. You’re playing the system, and you’re winning.

Credit score could be affected

But don’t get too complacent. The pattern of credit card use described above could hurt your credit score.

Here’s how: Say your favorite card has a credit limit of $5,000. One month you load everything onto it in order to maximize rewards. It was a particularly heavy month with a couple of unusually big purchases. You end up with a balance of $4,500. The chances are, your credit score could take a significant hit even though you pay off the entire $4,500 on the due date.

Credit card companies routinely report to credit bureaus at the end of each month your maximum balance during the billing cycle, as well as your credit limit. Those two figures are used to calculate your “credit utilization ratio.” If your credit utilization ratio is above 30 percent (in the example it was 90 percent), the bureaus tend to assume you’re maxing out your cards because you’re in trouble, and your credit score can fall.

Credit reports can take a bite

Nowadays, that matters. Lenders tend to tier interest rates according to credit scores. If you make an auto loan or credit card application while your credit score is below par, you could end up needlessly paying hundreds of dollars too much. If you were applying for a mortgage, the extra cost could run to thousands.

Worse, many employers run credit checks on applicants when they’re hiring, and some even run credit checks for internal promotions. Imagine how you’d feel if you were to be denied a job that you’d long coveted solely because your credit score didn’t accurately reflect your creditworthiness.

Disclaimer:The information in this article is believed to be accurate as of the date it was written. Please keep in mind that credit card offers change frequently. Therefore, we cannot guarantee the accuracy of the information in this article. Reasonable efforts are made to maintain accurate information. See the online credit card application for full terms and conditions on offers and rewards. Please verify all terms and conditions of any credit card prior to applying.

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