Published in: Credit Cards | Nov. 26, 2018

5 Ways to Tank Your Credit Score (and How to Prevent Them)

Want to avoid paying more every time you borrow money? Make sure to avoid these five major mistakes that will hurt your credit score.

A person holding a smartphone that says 811 credit score.

Image source: Getty Images.

Your credit score has an impact on virtually every aspect of your financial life. Whether you want a credit card for everyday purchases, a cell phone contract, a utility hookup, or a mortgage, your credit score will impact whether you get approved and on what terms. Your credit score can also impact your ability to rent an apartment, get a job, or pay reasonable rates for auto insurance.

Since credit scores are so important, it's imperative you do nothing to lower yours. Unfortunately, many people don't really know how their credit score is calculated or what factors could raise or lower it -- which leads to costly mistakes. To make sure you don't inadvertently make errors that affect your credit rating, you'll want to avoid these five mistakes that could hurt your credit.

1. Paying bills late

Payment history is the most important determining factor when your credit score is calculated. It accounts for 35% of your FICO® Score. A single late payment could drop your score more than 100 points, and the later the payment the more damaged your score will be.

Not only do creditors report if you're 30 days late, 60 days late, 90 days late, or in default, but your credit report will also consider bankruptcies and judgements against you when evaluating payment history. Bottom line: you must pay on time.

To make sure you're not late with your bills, set up automated payments for at least the minimum due. Add bill due dates to your calendar, and sign up for reminders with your creditors to make sure nothing falls through the cracks. If you get a bill for an irregular expense, either pay it right away or set yourself a reminder on your calendar so you don't forget.

2. Co-signing for someone irresponsible

If a friend or loved one comes to you and asks you to cosign, it's tempting to say yes because you want to help out. Unfortunately, this could destroy your credit score and potentially leave you on the hook for paying someone else's debt.

If you cosign for a loan, you're going to be held responsible for repaying it if the primary borrower fails to. Late payments or defaults will show up on your credit report, and the lender will come after you to collect if necessary. You may not even know the primary borrower is paying late until you have a bunch of derogatory marks on your credit report.

Because of the risk, just say no if someone asks you to cosign. If you really want to help and can afford it, consider making a loan yourself -- if the person asking doesn't pay it back, at least you'll only lose the money instead of facing damaged credit and being out the cash when the creditor comes to you for repayment.

3. Maxing out credit cards

If you have a lot of available credit, you may be tempted to use it. Unfortunately, maxing out your credit cards could damage your credit score. Credit utilization is another key factor in determining your score, and it's generally best to keep your utilization under 30% of available credit if you want the most favorable credit rating.

This would mean if you had $10,000 in available credit, you wouldn't want to owe more than $3,000. Maxing out your cards is a red flag for lenders who may worry you're living beyond your means and likely to become unable to repay what you owe.  

Of course, while you may be able to keep a $3,000 balance without hurting your credit, that doesn’t mean doing so is a good idea. If you keep a $3,000 balance on your card at all times and your card charges 15% interest with interest compounded daily, you’d pay over $485 in annual interest -- which is a major waste of money.

To avoid hurting your credit and wasting cash, be mindful of the amount you owe on each of your credit cards -- this can also help you to avoid getting too much into debt and paying a fortune in interest. Ideally, you shouldn’t carry a balance at all. If you're already maxed out, create a debt repayment plan to reduce your balance ASAP. You can also ask your creditor for a credit line increase, which will make your utilization ratio look lower. Just don't charge up the card to your new higher limit.

4. Closing old accounts

Closing old accounts can be bad news for your credit score. When you close down an open credit card or line of credit, you reduce your available credit. This hurts your utilization ratio since your existing debt now takes up a higher percentage of credit you still have available.

The length of your credit history also affects your credit score. The longer your history and the older your average age of accounts, the higher your score. That's why closing old accounts can be especially damaging.

To bypass this mistake, avoid closing accounts even if you haven't used them for a while. If you have an old card with an annual fee, ask if the card issuer would waive it or downgrade you to a card that doesn't charge you. And, be sure to use those old cards every once in a while to make a small purchase or the creditor may shut them down for inactivity.

5. Applying for too many new loans

Each time you try to borrow money and a potential lender does a credit check, an inquiry goes on your credit report. Inquiries stay on your report for two years, and too many of them can hurt your credit because lenders get worried you'll go on a spending spree or get in over your head with all the new debt you're taking on.

To avoid hurting your credit, try not to apply for lots of new loans all the time. If you're shopping for a mortgage or car loan and want to compare rates, apply with different lenders within a few days or a few weeks as this type of clustered credit checking won't hurt your score since scoring agencies and lenders realize you're shopping around.

Building good credit takes time -- and requires avoiding mistakes

It takes time to build good credit -- and it can take years to recover from the adverse effects of late payments or other major mistakes. To make sure you earn a great credit score that qualifies you for the most favorable terms on all of your financial transactions, be sure to follow best practices such as paying on time, keeping your credit utilization low, and not applying for too much credit at once. When your big purchases, like a mortgage or car, cost much less, the effort will be worth it.

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