Managing your credit score can definitely be challenging. You might be engaging in habits that negatively impact your credit score without realizing it. So being aware of the things that lots of us do unintentionally that can damage your credit score helps you avoid these same missteps.
1. Missing or Late Payments
Even a single late payment can significantly damage your credit score, as payment history is a key factor in credit scoring models. Missing a bill payment or paying even a few days late can leave a mark on your credit report for up to seven years. Setting reminders or automating your bill payments is a smart plan to avoid these negative impacts. Consistently on-time payments are one of the simplest ways to maintain and improve your credit score.
2. Using Too Much Available Credit
High credit utilization, or using a large portion of your available credit, can negatively impact your credit score. The generally accepted advice is keeping your credit utilization below 30% of your total available credit. Using under 30% of your available credit demonstrates to creditors that you are not overly reliant on credit and can manage your finances responsibly. Consistently maxing out credit cards is a red flag and can lead to a lower credit score.
3. Closing Old Credit Accounts
Closing old or unused credit accounts can negatively affect your credit score by decreasing your overall available credit and increasing your credit utilization ratio. It can also shorten your credit history over time, another key factor in credit scoring. It’s usually a better idea to keep older accounts open, even if you’re not using them frequently, to maintain a longer credit history and lower utilization ratio.
4. Applying for Multiple Credit Lines Simultaneously
Each application for a credit card or loan triggers a hard inquiry on your credit report, which can temporarily lower your score. Multiple applications within a short timeframe can accumulate these inquiries, leading to a more significant impact on your score. It’s wise to space out credit applications and only apply for new credit when necessary.
5. Co-Signing Loans
Co-signing a loan makes you equally responsible for the debt. If the primary borrower misses payments or defaults, it directly affects your credit score. While co-signing can be a generous gesture to help someone else, it carries substantial financial risks that can impact your credit health, so you should think long and hard about the potential ramifications before you cosign.
6. Ignoring Errors on Your Credit Report
Errors on credit reports, such as incorrect personal information, duplicated accounts, or fraudulent activities, are not uncommon. These inaccuracies can negatively impact your credit score. Regularly review your credit report from all three major credit bureaus and promptly dispute any errors you find to ensure your credit report accurately reflects your financial history and behavior.
7. Not Having a Diverse Credit Mix
Having a diverse mix of credit types, such as installment loans, credit cards, and mortgages, can positively influence your credit score. This diversity shows creditors that you are capable of managing various forms of credit responsibly. While it’s not the most crucial factor in credit scoring, a varied credit portfolio can contribute positively to your overall credit health.
8. Relying Solely on Debit Cards
Using only debit cards and avoiding credit cards altogether means you’re missing out on building a credit history. A credit history is essential for future financial needs, like obtaining a mortgage or car loan. Responsible use of a credit card, including regular payments and keeping balances low, is one of the most effective ways to build or improve your credit score, demonstrating to lenders your reliability as a borrower.
9. Consolidating Debt Incorrectly
Debt consolidation, if not handled correctly, can negatively impact your credit score. For example, transferring multiple credit card balances to one card might seem efficient, but it can significantly increase your credit utilization ratio on that card. High utilization can be a red flag to creditors. It’s important to understand the terms of consolidation and consider how it will affect your overall credit profile before proceeding.
10. Not Using Credit Cards at All
Avoiding credit card usage altogether can ironically hurt your credit score. Credit bureaus need to see a history of regular, responsible credit usage to calculate a reliable score. Inactive credit cards don’t contribute to this history. Using your credit cards for small purchases and paying off the balances each month is a straightforward way to maintain and build a good credit score.
11. Carrying High Balances on Cards
Regularly carrying high balances on your credit cards, even with timely payments, can negatively impact your credit score. High ongoing balances suggest to creditors that you rely heavily on credit, which can be a risk indicator. It’s crucial to keep your balances manageable and ideally pay them off in full each month to maintain a healthy credit utilization ratio.
12. Avoiding Credit Checks for Fear of Impact
Many people avoid checking their credit scores for fear of negatively impacting them. However, regularly monitoring your credit is essential for maintaining good credit health. Soft inquiries, such as checking your own credit score, do not affect your score. These checks are important for spotting errors or signs of fraud early on.
13. Overlooking Joint Accounts
Joint accounts are a shared responsibility and are reflected on both parties’ credit reports. Neglecting these accounts, or assuming the other individual is managing them, can lead to unpleasant surprises on your credit report. It’s crucial to actively manage and monitor all joint accounts to ensure they are in good standing.
14. Paying Only the Minimum Due
Consistently paying only the minimum amount due on your credit cards can result in accruing interest and growing balances. This makes it harder to pay off the debt and can also negatively affect your credit utilization ratio. Aim to pay more than the minimum or, better yet, the full balance each month.
15. Disregarding Medical Bills
Don’t ignore your unpaid medical bills, as they can be sent to collections and significantly damage your credit score. Like any other bill, it’s important to address medical bills promptly. Many medical providers are willing to negotiate payment plans or reduced settlements if you’re struggling to pay.
16. Not Having a Long Credit History
A short credit history can be a limitation in achieving a high credit score, especially for young adults or new credit users. Building a lengthy credit history with consistent, responsible behavior is crucial. This includes paying bills on time, keeping balances low, and maintaining older accounts to lengthen your credit history.
17. Transferring Balances Repeatedly
Regularly transferring balances from one credit card to another to capitalize on promotional interest rates can raise concerns among lenders. This practice may indicate an ongoing struggle to pay down debt rather than a strategic financial move. It can also lead to the accumulation of fees and an increasingly complex debt situation, making it difficult to achieve a stable financial footing.
18. Using Cash Advances
Relying on cash advances from your credit card is a costly habit that can quickly escalate your debt. Cash advances typically come with high fees and interest rates, and they increase your credit utilization ratio, which negatively impacts your credit score. Remember, interest on cash advances starts accruing immediately, adding to the overall cost.
19. Ignoring the Impact of Personal Loans
While personal loans are a strategic tool for consolidating and managing debt, they also contribute to your overall credit utilization. Obtaining personal loans without a solid plan for repayment can adversely affect your credit score. Carefully consider the implications of additional loans on your overall financial health and credit standing.
20. Not Updating Personal Information
Keeping your personal information updated on your credit report is crucial. Outdated or incorrect information, such as old addresses or misspelled names, can lead to confusion, identity verification issues, and potential mix-ups with your credit history. Regularly reviewing and updating your information ensures the accuracy of your credit report and smooth credit applications.
21. Frequently Changing Jobs
Frequent job changes can indirectly affect your credit score. Lenders often view consistent employment as a sign of financial stability. Regular job changes might be interpreted as instability, potentially impacting your perceived creditworthiness and ability to secure loans or favorable credit terms.
22. Not Understanding Credit Terms
A lack of understanding of your credit card terms, such as interest rates, fees, and credit limits, can lead to poor credit management practices. For instance, missing payments or exceeding credit limits due to misunderstanding terms can harm your credit score. Make sure you’re fully aware of the terms and conditions of your credit agreements.
23. Defaulting on Utility Payments
While utility payments generally don’t impact your credit score, defaulting on these payments can. If unpaid utility bills are handed over to collections, it can significantly harm your credit standing. Ensuring timely payment of all bills, including utilities, is crucial to maintaining a healthy credit score.
24. Thinking All Credit Scores Are the Same
Each of the major credit bureaus may have slightly different credit scores for you, based on their specific scoring models and the information available to them. Don’t assume that all your scores are identical, as lenders may check your credit from any or multiple bureaus. Understanding this can help you better anticipate how lenders view your creditworthiness.
