Bad Habits that Can Ruin Your Credit Score
Everyone wants a better credit score, but there’s more to the credit game than simply making your payments on time. Other factors – such as how you use credit, how often you use credit, and even what kind of credit you use can all affect your score. And if you don’t know exactly how your score is determined, you might be doing things that bring that score down.
I’ve made a list of four common behaviors that can hurt your credit score. Are you guilty of any of these credit-score killers?
- Using in-store financing or store-specific credit cards. Stores that sell big-ticket items like furniture, major appliances, and cars usually try to entice buyers with financing offers that sound too good to be true – no money down, and no payments for a year or so. On the surface, these offers sound like a good way to save cash on a big purchase – but the truth is, they can do a number on your credit score.
Part of your credit score is determined by your ratio of available credit to the amount of credit you actually use. If you have a zero balance on a card with a $5,000 limit, you look like you use credit responsibly, and you’re more likely to have a higher credit score. If you have a balance of, say, $4,900, you look like a high risk. In other words, maxed-out credit cards don’t look good. If you want to take advantage of a no-money down/no payments for XX months offer on a new washer and dryer, the store will give you a line of credit – just big enough to cover your purchase. You might not be paying interest, but you’re adding a maxed-out credit account to your credit report.
And, while we’re on the subject of store credit: Never open a line of credit at a department store or any other specialty store. It’s tempting, I’ll admit: Most stores give you a 15 or 20 percent discount on whatever you’re buying, just for applying. If you’re making a large purchase, it’s easy to rationalize just one more card. But store-specific credit cards are notorious for having super-high interest rates.
Another thing to keep in mind? Applying for that in-store credit card will trigger a “hard inquiry” on your credit history, which leads us to the next bad habit . . .
- Applying for too many lines of credit. Any time you apply for new credit – whether you’re shopping for a balance transfer offer, financing a car, or trying to get a mortgage or even rent a new apartment – someone is going to run your credit. And every time someone runs your credit (also known as a “hard inquiry”), it shows up on your credit history. Hard inquiries stay on your credit report for two years – and each one can knock your credit score down a few points.
You might not be able to eliminate all hard inquiries – but you can cut down on them quite a bit: First of all, don’t apply for new credit cards. That’s an easy one. And in cases where a “hard inquiry” can’t be avoided, try to at least cut down on the number of people running your credit: For example, don’t let a car dealership or an apartment leasing office run your credit until you’re absolutely sure that you want to do business there. While you’re shopping around, bring your own copy of your credit report, just to show that you mean business (you’re entitled to three free credit reports per year from the three major reporting agencies, and these aren’t considered hard inquiries, so they don’t hurt your credit score).
- Not paying your credit card. I know, this seems like an obvious one – but it’s worth mentioning that it’s never – ever – okay to just not pay your credit card. In cases where you feel like you’re in over your head, balance-wise, or if you’re having trouble making your monthly payments, it’s a much better idea to contact your lender and discuss your situation. You might be able to get your minimum payments lowered, or negotiate for a reduced interest rate. But don’t just stop paying – all that does is lower your credit score. Same goes for a dispute — always get in touch with your credit card company if you’ve got a problem or concern about your bill. And until the situation is resolved, you should keep making your payments.
- Closing credit card accounts. If you’ve ever paid off a card with a high balance, chances are that your first thought was something like, “Good riddance. I’m closing this thing before it gets me in trouble again.” I definitely understand the feeling – but closing your card may not be the answer.
Here’s why: Remember what I said earlier about the ratio between available credit and the credit you’re actually using? So let’s say you have two credit cards: One with a $5,000 limit and a zero balance, and another, smaller one with a $2,000 limit and a $1,000 balance. In this situation, your total available credit is $7,000 – and you’re only using $1,000 of it, which you’re steadily paying down, on time.
Now let’s say you close the card with the $5,000 limit. Suddenly, your available credit plummets to $2,000. Your credit report won’t show that you paid down $5,000 in debt. But it will show that you’ve used half of your available credit – and that will bring your credit score down. It’s better to have the credit available and not use it. If the card is too tempting, cut it up or lock it away – but don’t close it.
What do you think? Are you guilty of any of these bad credit card habits? Do you have any you’d like to add to the list? Leave a comment and let me know!
Tags: credit score