Have you been keeping an eye on your credit score lately? If you have plans for financing major purchases in the future, it helps to stay updated on how well your credit is doing.

The Consumer Financial Protection Bureau has a good summary of a credit score: it’s a prediction of your credit behavior, which includes how likely you are to pay a loan back on time. In other words, lenders use it to determine your trustworthiness when repaying debts.

Aside from a mortgage or car loan, credit scores are also used to make decisions on many other things, like renting property, getting a credit card, or taking out an insurance policy.

With how influential a credit score can be in your daily life, it makes sense to keep an eye on its “health.” That is, you should adopt borrowing (and spending) habits that keep your score in a reasonable range. This is an integral part of ensuring you maximize the chances of success when financing a house, car, or other significant purchase.

You can improve your financial capability by avoiding common credit score pitfalls. Here’s where you can start.

What influences a credit score anyway?

A credit score, also known as creditworthiness, provides a snapshot of your ability to manage credit and loans. It’s represented as a number, typically between 300 and 850, indicating how likely you are to repay a loan and make timely payments.

There have been active efforts to “demystify” credit scores so that consumers know what lenders look for when evaluating a loan application. NerdWallet has a great write-up on the factors that affect your credit score. They include:

• Payment history
• Credit utilization
• Age of credit or loan accounts
• Credit mix (the different types of loans someone has)
  

Knowing the most influential factors that affect your credit is key to understanding the habits to adopt or avoid when using a credit card or paying back a loan.

With that out of the way, let’s discuss some common pitfalls to avoid when handling your credit.

Making Only Minimum Credit Card Payments

This first pitfall is pretty tricky. From a technical standpoint, making timely payments is a very influential factor (if not the biggest) in your credit score. However, it’s making minimum payments that this strategy begins to unravel.

The remaining balance accrues interest if you only make minimum payments on your credit card bills. The interest then gets added to your balance, contributing to your credit limit.

Consequently, having an outstanding balance can adversely affect your credit utilization ratio, the amount of credit you’re using compared to your total credit. A high ratio (exceeding 30% of your limit) signals to bureaus that you may be relying too much on your credit, which will lower your score.

Always try to pay your credit card balances in full by the due date of each billing cycle. If paying in full isn’t feasible, do your best to pay beyond the minimum balance.

Keeping High Balances on Rewards-Focused Cards

If your credit card has cash back or a rewards program, you may be tempted to use it more to enjoy its advantages. After all, who doesn’t like getting a little extra for buying things one would already purchase anyway?

While rewards-focused cards can be a neat little perk, they shouldn’t be the definitive purpose for having a credit card. Don’t be tempted to reach for the plastic just to accumulate points. At the end of the billing cycle, your balance will always have the costliest total.

Cards with cash back or rewards should be treated like any other credit product: only charge it if you can pay it back sensibly. Follow our sustainable tips for credit card use:

• Always keep your budget in mind
• Make payments on time
• Pay off the balance in full or as much as possible
  

Closing Unused Credit Card Accounts

Many credit scoring models use your credit history's total “age” when making your report. This means they are looking at your oldest open credit card account, even if you aren’t actively using it.

You may be tempted to cancel unused credit cards, especially if you haven’t used them in a while. However, you should avoid doing this if possible. Closing an account will make you appear to have a shorter credit history. Additionally, having fewer credit cards will affect your credit limit (and utilization ratio). Both of these factors will likely lower your credit score.

Only close an account if you’re not using it, and it is costly to keep it open (for example, if it has an annual fee). Credit cards with very low limits might also be a good candidate. According to Experian, your credit history is evaluated based on your oldest and newest open credit accounts. Keep this in mind if you must consider closing an account.

Your credit becomes a powerful tool when utilized strategically. Follow these tips, and you will build skills that empower you to finance the big moments in your life.

First Florida is committed to helping you strengthen your credit smartly. Explore our Featured Articles to learn more about practical spending and budgeting tips.