Your credit report and credit score can open doors you may never have imagined they could.
As most people know, an excellent credit report and a high credit score will afford you ample choices when you're shopping for a home loan at an attractive interest rate. But they can do so much more, too. Your credit report could also help you nab the job of your dreams, or get auto or home insurance at a lower premium than the average American. A pristine credit report could also mean little or no deposit when opening an account with a utility company.
However, the flip side of this is also true. If you don't take the time to manage your credit wisely, then doors of opportunity can be closed. Prospective employers could deny your application based on the impression that you're not a responsible individual, and lenders could deny you for home loans. Rental applications may be denied due to your poor credit history, or you may be required to put down an exceptionally high deposit with utility companies prior to commencing service.
You could be hurting your credit score without even knowing it
I'd venture to guess that most Americans are somewhat familiar with the basic factors that can impact their credit scores. For instance, if you pay your bills on time, your credit score will probably climb. Conversely, if you're late with your payments or have collections on your credit report, then your score is going to take a hit.
But there are other shocking ways that your credit score can be harmed through seemingly benign activities. Here are seven ways you could be hurting your credit score without even realizing it.
1. Closing unused accounts
One of the easiest ways to hurt your credit score without realizing it is to close credit accounts that you rarely use. You may be thinking that closing unused accounts could earn you brownie points with creditors by demonstrating that you're being responsible. However, closing unused credit accounts actually hurts your credit score in two ways.
First, closing long-standing accounts may reduce the average length of time that your credit accounts have been open. The longer your average account has been open, the higher your credit score, generally speaking. If you wind up closing long-tenured, good-standing accounts because you're not using them much, you're wiping out the benefit of having that account open and in good standing for a long period of time.
Secondly, closing an account means reducing your available aggregate credit amount. Reducing your available credit causes your credit utilization ratio to rise. Anything above 30% aggregate usage could lower your credit score.
2. Not checking your credit report
According to a Google Consumer Survey conducted by TransUnion in 2013, 33% of Americans admitted to never checking their credit reports or credit scores. Ignorance is unfortunately not bliss in this instance, because it's quite possible for errors to appear on your credit report from one or more of the three major credit reporting bureaus (Experian, TransUnion, and Equifax). Not checking your credit report annually could allow these errors to remain on your report without your knowledge, dragging down your credit score in the process.
Here's the good news: You can check your credit report from all three credit bureaus once annually for free. That's right, I did just say free. To check your credit report for free, head to AnnualCreditReport.com.
3. Using more than 30% of your available credit (even if you pay your bill in full)
Even if you're responsible and pay your bills on time each month, you could be negatively impacting your credit score if you're using too much of your available credit. Industry pundits suggest that you never use more than 30% of your available credit. Using more could be construed by creditors as irresponsible, and it may lower your credit score.
Even if you pay your bills in full each month, it's still possible (and I can speak firsthand on this) to hurt your credit score by going over the 30% credit utilization threshold. The good news is that the dip in your credit score is probably temporary if you're paying your bill in full and on time each month, or at least getting your net balance owed below 30% of your aggregate available credit. However, the timing of when a credit report is run could certainly have some bearing on whether your credit score takes a hit or not.
4. Ignoring traffic and parking citations
Chances are that if you receive a traffic citation or parking ticket near your home city, you're going to take care of it. That may not always be the case if you're vacationing 2,000 miles away and receive a parking ticket. If you ignore traffic or parking citations, they could be turned over to a collection agency, where they could pop up on your credit report and remain there for a period of between three and seven years.
Ignorance to a citation won't excuse you, either. If the government agency mails your citation to an old address and you fail to pay, the fault remains with you. Make sure the U.S. Post Office has your most recent address on file and your driver's license is up to date.
5. Unpaid utility bills
Utility bills, such as an electric bill or water bill, can be something of a double-edged sword for consumers. On one hand, it's highly unlikely that utility companies will report timely payments to credit bureaus that'll determine your credit score.
On the flip side, if you're habitually late with your payment, or you have unpaid utility bills, then the utility may not hesitate to turn your account over to a collection agency. Having an account sent to a collection agency can show up on your credit report for years, and it can adversely impact your credit score.
6. Unpaid federal income taxes
Believe it or not, tax disagreements between you and Uncle Sam could come back to haunt you in the credit column. If you have unpaid federal income taxes, the government, after enough time and effort to collect what's due, could place a lien on your property or wages to collect what you owe.
Federal tax liens can show up on your credit report for a mind-numbing 15 years, meaning they could wind up wreaking havoc on your ability to open new credit accounts for more than a decade to come. Even paid federal tax liens remain on your credit report for a period of seven years from the file date.
7. Fines from a library
While this may be a bit of a stretch, and I'll admit it sounds almost comical, checking out books from the library and failing to return them on time could wind up negatively impacting your credit score. If you rack up late fees at the library and fail to pay those fees, it's possible -- unlikely, but possible -- that the library could turn your late fee over to a collection agency.
For example, in 1996, the Queens Library system in New York hired a professional collection agency to collect the daily late fines, as well as the missing materials that consumers didn't return. Having a library fine sent to collections could result in an almost laughably low fine, but it could have an impact on your credit report and/or credit score for years.