4 Surprising Things That Can Lower Your Credit Score
You work hard to keep your credit score high. Don't let these careless mistakes ruin it.
You probably know that paying bills late, maxing out your credit cards, and defaulting on loans can tank your credit score, but this is just the tip of the iceberg. Some seemingly harmless actions, such as closing unused credit cards, could also have unintended effects on your credit score. Here are four surprising things that could hurt your chances of approval the next time you apply for a loan or credit card.
1. Closing down old credit accounts
It may seem wise to cancel a credit card you're no longer using, but this could hurt your credit, especially if it's a card that you've had for a long time. Credit scoring models consider the average age of your credit accounts when determining your score, and a longer history of managing credit responsibly results in a higher score. Closing a credit card could reduce your average account age, and your credit score could take a slight hit.
You'll also reduce your total available credit when you cancel a credit card. If your spending remains the same, this means your credit utilization ratio will go up. This figure is the percentage of your available credit that you use each month. A high credit utilization ratio is a red flag to lenders because it can indicate that you're living beyond your means and may be unable to pay back what you borrow. Ideally, you should aim to use 30% or less of your available credit at any given time.
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Think carefully before canceling your credit card and understand how doing so will affect your average account age and credit utilization ratio. If your credit card doesn't have an annual fee, you may be better off keeping it so as not to risk the negative impact that canceling it could have on your credit score.
2. Applying for new credit
Applying for new loans or credit cards can be good or bad for your credit, depending on whether or not you're approved. Every time you apply for new credit, the lender will do a hard inquiry on your credit report to assess your creditworthiness. This drops your credit score by a few points. Credit scoring models recognize that it's normal to shop around when looking for a new loan or credit card, so all inquiries that take place within a 30- to 45-day period will typically count as a single inquiry. But if you apply for new credit after this period, you'll end up with another hard inquiry on your report, and your credit score will drop by a few more points.
If you're approved for the loan or credit card, these small dips in your score shouldn't matter, because you'll now have access to more credit, and thus your credit utilization ratio will drop. This could actually improve your credit score. But if you're denied the credit card or loan, you'll have lowered your credit score for no reason.
You can avoid this by not applying for new credit unless you actually need it and feel confident that you'll be approved. If your credit is poor right now, take steps to improve it by opening a secured credit card, making your payments on time, and limiting your credit utilization. Then, when your score improves, you can apply for better credit cards and loans.
3. Errors in your credit report
Mistakes are not the only thing that can ruin your credit. If someone steals your identity and uses it to open up false accounts in your name, you could pay the price for their actions. Everyone is entitled to one free credit report from each credit bureau per year through AnnualCreditReport.com. Check yours and look for any accounts you don't recognize or anything that seems incorrect. Even if you aren't a victim of identity theft, it's possible that a financial institution made an error or confused you with someone else with a similar name when reporting to the credit bureaus.
If you notice anything that seems out of place, notify the credit bureau and the financial institution the account is associated with. Consider placing a fraud alert on your account if you believe you've been the victim of identity theft. This will tell lenders to take extra measures to verify your identity before opening new credit accounts in your name.
4. Unpaid parking tickets and overdue library books
You may not think a parking ticket or overdue library book could cause you much trouble, but if you rack up a bunch of late fees and fail to pay, it's possible that the city or library could send you to collections. This shows up on your credit report, and it stays there for seven years from the original delinquency date. This could make lenders reluctant to give you money.
You can avoid this by staying on top of all your bills and paying them promptly. If you know a payment will be late, reach out to the individual or company you owe and explain your situation. If this is your first time paying late, you may be able to persuade them not to refer you to collections or report the late payment on your credit report.
A high credit score is key to securing new loans and lines of credit, but if you're making any of the four mistakes listed above, you could be hurting your score inadvertently. Take steps to correct this now by verifying the accuracy of your credit reports, paying any overdue bills, and limiting how often you apply for or close your credit accounts.
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