Five credit decisions that can come back to bite you

Common sense can let you down if you use it to make credit decisions. Here are reasonable sounding credit moves that can hurt you — and what to do instead.

Assuming that paying on time ensures a good score

Paying on time is just one of two major influences on your score. The other is the portion of your credit card limits you are using. Experts suggest using no more than 30% of the limit on any card. Instead, make sure your credit utilization stays below 30% throughout the billing cycle. You can make multiple small payments throughout the month to keep the balance consistently low relative to your limit.

Closing a credit card

You may think a credit card that sits in a drawer unused is just clutter and decide to close it. But it can still help your credit. And the higher its credit limit, the more it helps. That's because your total credit utilization matters as well as per-card credit usage. Closing a credit card can send your overall utilization up, hurting your score. Instead, keep credit cards open, unless you have a compelling reason to close them.

Paying off a loan early

Paying a loan early has no effect on your credit score. But having fewer credit accounts can hurt by reducing the overall age and mix of your accounts. Instead, focus on what's best for your finances. If you have a 0% loan, there's not a lot of incentive to pay early. If you have a loan charging 29% interest, though, there is. The potential for a dip in your score is not a good reason to continue to pay a lot of interest.

There is a persistent myth that paying something — even if you cannot pay the minimum — will keep you from being sent to collections. If you don't pay at least the minimum by 30 days past the due date, the creditor can report your account as delinquent to the credit bureaus. Instead, if you are unable to pay even the minimums, talk with a nonprofit credit counselor.

Rejecting a higher credit limit

The more available credit you have, the more likely you are to go into debt, right? That's not what the data show, and credit scores are all about statistics and probability. A higher credit limit is generally a good thing unless you are sure it will tempt you to overspend. You should accept the higher limit and keep your spending steady. That will lower your credit utilization.