When your credit score means so much to your future borrowing ability, the last thing you would want to do is unknowingly torpedo it by making bad financial moves. But how would you feel if we told you that even well-meaning, seemingly smart money decisions can hurt your credit score?
Frankly, if you’re reading this article, you’re ahead of the game – so don’t worry. When nearly half of Americans don’t even KNOW their credit scores, having some semblance of a grasp on yours is a positive step in the right direction. Regardless, that doesn’t mean that yours may need a bit of a boost – and that you could use a little education about how to avoid your score taking unnecessary hits. Read on to see if you’ve made any of these bad credit moves and if so, what you can do to set yourself straight again.
#1: Closing old accounts
You may think closing out that credit account you opened in college (the one you started so you could “learn how to charge responsibly”) is virtually harmless – but think again. If you want to maintain the highest possible credit rating, keep your accounts open! Here’s why:
If you have a solid credit history associated with each of your accounts – meaning no accrued debt or interest, consistently late payments, etc. – then it will eventually drop off of your history, thus lowering your credit score.
Additionally, FICO tends to favor those with longer credit histories, because in lenders’ minds, a longer history equals lessened risk when it comes to giving out loans. That’s why so much of your score is associated with your credit history length.
So, when you’re tempted to close out old accounts to “clean things up,” keep them open. They aren’t hurting anyone – so long as they aren’t constantly tempting you to overspend.
#2: Carrying unnecessarily high utilization
Nearly one-third of your credit score is based on a concept called “utilization,” which measures the credit you have versus the credit you use. An ideal utilization balance involves the highest possible credit limits with the lowest possible balance.
There are two key ways to manage your credit utilization ratio. First, keep those old accounts open to enlarge the total amount of credit available to you. Second, pay off as much of your credit card debt (and other debts!) as you possibly can. Simply stated, if you have the cash available to knock out your balances, do so. This will also save you loads on accrued interest on carried balances.
#3: Applying for retail credit cards
No matter how long you’ve been a denizen of Nordstrom’s annual sale, resist the urge to apply for a store credit card – even if the sales clerks convince you that you will see even bigger savings. Each time you apply for a new card, credit agencies will make a hard inquiry into your credit report, which puts a dent in your score – particularly if you have multiple inquiries in a twelve-month period.
Keep in mind that credit agencies are not the only groups that make inquiries into your credit report: So do prospective employers, life insurance carriers, landlords, and more. As such, you may have multiple hard inquiries piling up without even realizing it – which can be a serious blow to your score.
#4: Not batching your credit report requests from all three agencies
Even if you want to focus on just one credit score, it’s vital to stay abreast of your reports with all three credit agencies: Equifax, TransUnion, and Experian. These companies compile the data on which your score is based.
When you request a copy of your credit report, it is advisable to request it from all three. This is largely because some creditors only report to one or two of the agencies, so in order to create the most accurate picture of your credit standing, you will want to ensure you can compare each report. Not to mention, if one report shows a discrepancy, you can flag it: Uknown errors or flaws on one of your reports can hurt your score when they remain undetected.
#5: Consistently Paying Late or Missing Payments
Here’s the biggie: MAKE YOUR PAYMENTS ON TIME. While you may not think an occasional missed – or late – payment is a big deal, approximately 35% of your credit score is based on your payment history. This is because lenders want to know that you have a history of reliable borrowing and spending before they offer you more credit.
If you have issues making your payments on time, consider rethinking the way you use your credit cards: Rather than swiping with abandon and letting balances pile up, consider treating your credit cards like you would cash or a debit card. In other words, if you don’t have the money to cover a purchase, don’t make it! Credit cards are not “free money;” they are a convenience tool. Don’t fall prey to convenience to the point that you cannot cover your own tracks.
And if you are really struggling? Consider another option. Some of the best credit card consolidation companies out there can help you manage your debt so that you can pay it down faster – and avoid rapidly accruing interest that will leave you deeper in the hole.
Seeking debt relief
If you’ve found yourself trapped in a cycle of credit card debt, it’s important to seek help before it becomes unmanageable. And even once it has, you still have options. Consider reaching out to a reputable debt relief company, a credit counselor, or a financial planner to help you rebuild your credit and get back on the track toward financial freedom.
