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There are lots of non-crazy things that hurt your credit score:
- late payments
- missed payments
- bankruptcy
- accounts in collections
But today we’re going to talk specifically about the things you wouldn’t expect to hurt your credit. The things you do when you’re trying to manage credit responsibly. Logically these things should boost your credit score, but instead, they drag it down.
Here are 5 crazy things that hurt your credit score.
5 Crazy Things That Hurt Your Credit Score
1. Assuming Your Credit Report is Accurate
Because your credit score is so important, you would think your credit report would be accurate, right?
Well, not so much. Errors on credit reports are incredibly common. You could easily have a lower credit score than you deserve because of a simple data entry mistake on your credit report.
Here’s a little good news: because mistakes are so common, there’s a fairly easy process for correcting them.
Start by reviewing your credit report. You can get a free copy of your credit report from sites like freecreditreport.com or creditkarma.com.
Now, check for errors.
Here are some of the most common errors that negatively affect your credit score.
- Missing accounts
- Duplicate accounts
- Incorrect payment history
- Incorrect credit limits
- Suspicious activity
If you see a mistake, contact the credit bureau(s) reporting the error (Experian, Equifax, and/or TransUnion) and dispute that error. Then give them 30 days to correct the report.
Done!
2. Avoiding Debt
I know it sounds like a good idea to simply avoid debt. But that can actually bite you in the tush.
See, our financial systems are built on using credit scores to determine creditworthiness. If you avoid debt completely, you won’t have enough of a history with debt payments to prove your creditworthiness.
Your credit score will stay low, and if you ever really need to borrow money (because how many of us want to wait until we have enough saved to pay cash for a house?!), you either
- will get terrible terms with high interest rates OR
- won’t be able to get a loan at all.
A home loan isn’t the only time debt-averse people might have to use debt. Maybe you decide you need a college degree after all, and you need a student loan to cover some of the expense. Or maybe your future college kid needs someone to co-sign a student loan. Maybe you need to cover unexpected medical bill at some point, and a loan is the only way to do it.
The point is, even if you don’t like the idea of debt or credit, you may need it at some point. So it’s best to be prepared by bolstering your credit score now.
There are a few ways to use debt responsibly and simultaneously boost your credit score. For example, we love using credit cards to build credit from scratch. Just make sure you’re not spending more than you would if you were paying with your bank card, and make sure you pay the bill in full every month to avoid paying interest.
3. Applying for Too Many Credit Cards
Knowing that avoiding debt is one of the things that hurt your credit score, you might be tempted to open a bunch of credit cards to start building credit. Unfortunately, this is another entry on our list of things that hurt your credit score.
You might have heard that too many credit checks will lower your credit score. This is only partially true. “Soft pulls” (simple credit reviews) won’t affect your credit, but “hard pulls” (checking your credit for the purpose of opening a new line of credit) will give your credit a little ding.
Here’s why:
Credit bureaus get nervous when they see people try to take on a bunch of debt and/or lines of credit over a short period of time. They think you’re opening a bunch of cards either because you’re totally desperate for money or because you’re planning a frivolous spending spree.
That’s why too many hard pulls over a short period will lower your credit score. And actually opening a bunch of credit cards over a short period is even worse.
Keep that in mind when you’re offered store credit cards to save 10% on your shopping total.
I’ll admit, I have a Target Red Card, an Amazon card, an Ann Taylor card, an Express card, and my trusty Capital One card (and I think maybe cards for Best Buy, Gap, and Macy’s too). But those were all opened at least 6 months apart. And if I’m going to use them, it’s for a discount or rewards program. And of course the balance gets paid in full so I never pay a cent in interest.
4. Keeping a Large Balance on Your Cards
Now, since you’re not going to open a bunch of cards at one time, it stands to reason that you’d get one general credit card (as opposed to a card for a specific store), and use that for everything to keep your credit score climbing.
But this is also problematic. Even if you do pay the balance in full every month.
Bear with me here…
Credit bureaus want to see use only a small percentage of the credit available to you. They want you to qualify for high credit limits, but then have the financial self-control not to use it. They measure this with a “credit utilization ratio”.
The magic number for your ideal credit utilization ratio is 30% or less. At any time, you should only be using up to 30% of your credit limit.
Let’s look at an example:
Say you have a credit card with a $5,000 limit. And your current balance on that card is $4,500. Your credit utilization ratio for that card is 90% (4500/5000 = 90%). To get to the desired 30%, you’d need to keep that balance down under $1,500 (5000 x .30 = 1500).
But what if you pay your bill in full every month? Why wouldn’t that keep your credit score from dipping?
It’s all about timing. Your credit card company likely reports your balances to the credit bureaus every month before you have a chance to make your monthly payment. So if you put $3,000 per month on your $5,000-limit card every month, that’s what the credit bureaus see every month. Yeah, they also see that you make payments, but they ding you for using too much of your credit limit.
Moral of the story: Know your credit limits, and stay under that 30% threshold.
5. Closing Credit Card Accounts Once the Card is Paid Off
The final entry on our list of crazy things that hurt your credit score is the craziest!
So you’ve had your credit card for a while and made payments consistently. You no longer need the card, and you don’t want to be tempted to use it. So you should close the account, right?
Weirdly, no. Closing that account will hurt your credit.
I made this mistake myself once. When I was first out of high school and needed a computer, it made sense to use a Best Buy card with a 2-year 0% interest period (instead of not having a computer for 2 years while I saved the money to buy one with cash). I paid off the card in about 18 months, then closed the account so I would never be tempted to use it unnecessarily. And my credit took an immediate hit. So stupid!
But it comes back to that credit card utilization rate we just covered.
By closing my account, I was lowering my total credit limit. I no longer had access to that $3,000 line of credit. So now I was using a higher percentage of my total credit limit because of the balances on my other cards.
If you don’t want to be tempted to use a credit card, cut up the card, make sure the card isn’t saved to any online accounts, then forget the account exists. You might get a new card in the mail every few years since the account is still active, but you can just cut those up as well.
As long as the account remains open, your credit score will see the benefit of having a large line of credit you’re not using.
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Did we miss anything? Do you know of any other crazy things that hurt your credit score? Let us know in the comments!
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