Your credit score is one of the most important aspects of your financial life, as it plays a huge role in lending decisions. It’s used by banks to decide whether to give you a loan or a credit card. Some service providers may consider it when determining whether you should pay a security deposit. Also, car insurance providers use your credit score to set your insurance rate. While it’s crucial to understand the factors that can help you build a good credit score, it’s just as important to know what things could potentially damage it. Within this article, you’ll find nine factors that can hurt your credit score and what you can do about each of them.
Although this is one of the most obvious examples, it is still worth mentioning. Your payment history on loan and credit accounts is the most heavily weighted category, so it’s crucial to get it right. Depending on the scoring model used, even a single late payment on a loan or credit account can lead to a decrease. If you have recent late payments on your credit report, it doesn’t matter if you keep your credit card balances low or only apply for credit occasionally. This is why you’ll need to prioritize making payments on time.
Credit Card Minimum Payments
If not carefully monitored, your credit card minimum monthly payment can result in missed payments, loan rejections, and a damaged credit score. Therefore, it’s important to learn how credit companies calculate your minimum payment. Tally can help you get a better understanding of the credit card minimum payment calculator used by your credit card issuer. Familiarizing yourself with the credit card minimum payment calculator will enable you to predict your minimum payment for the next billing cycle and make adjustments. As a result, this will prevent you from incurring late fees, which can affect your credit score.
Errors On Your Credit Report
At times, credit reports may contain errors, and in many cases, these errors can adversely affect a consumer’s credit profile. Therefore, it’s essential to regularly check your credit report from all three major credit agencies – Equifax, TransUnion, and Experian. Ensure that you recognize all accounts and credit inquiries and check that all details, such as your payment history, are accurate. Remember that you’re legally entitled to one free copy from each credit bureau once every year. If you identify an error, it’s important to dispute the information as soon as possible.
High Credit Utilization Ratio
Another crucial factor that is used to calculate your credit score is your credit utilization ratio. The ratio represents how much of credit you’re using in comparison to the entire amount available to you. In general, lenders and creditors prefer to see a lower debt-to-credit ratio, ideally below 30%. Keep in mind that opening new accounts with the sole aim of reducing your debt-to-credit ratio isn’t advisable, as this can affect your credit score negatively. You should only apply for the credit you need, when you need it.
Closing A Credit Card Account
While it may be tempting to close a credit card account that is already paid in full, this can also damage your credit score. Apart from affecting your credit utilization ratio, closing a credit card account might also impact the mix of credit accounts on your credit reports. This is because lenders and creditors prefer to see that you have been able to manage different types of credit accounts over a long period of time. In addition, closing an account that you have had for a long time can shorten the length of your credit history.
Applying For Too Much Credit At Once
Every time your application is assessed by creditors or lenders in response to an application for credit, a hard inquiry is conducted. As a result, hard inquiries appear on your credit report, which can have an impact on your credit score. If you apply for multiple credit accounts in a short amount of time, this may cause lenders to see you as a high-risk borrower. This is because too many hard inquiries at once can make it seem like you’re applying for loans and credit cards that you’re unable to pay back. Therefore, you should ensure that they occur sparingly so that you can maintain a good credit score.
Stopping Credit-Related Activities
It can be difficult for lenders and creditors to assess your application for credit and services, if you haven’t used your credit accounts for an extended period of time. This also means that they won’t be able to report new information to credit reporting agencies. Additionally, following a certain period of time, your credit card account may be closed by the lender due to inactivity. Therefore, to ensure the account stays active, you should focus on using it responsibly. For example, you may use it for small purchases or put a small recurring charge on it.
Cosigning A Loan
Cosigning a loan or a credit account for someone else means that you have accepted legal responsibility for making the payments. Just like any other account under your name, this also becomes a credit obligation to consider. Consequently, the account you have cosigned will likely appear on your credit report, as well as that of the other account holder. However, if that person makes payments on time each month, being a cosigner can actually help to improve your credit score. In comparison, if they develop a habit of being late, this can have a negative impact.
New Credit Accounts
Although this is a smaller category of information that can affect your credit score, new credit is another area worth considering. Opening new credit accounts may also affect the length of your credit history, which encompasses a range of time-related metrics, that also play a role in your credit score. One of these key metrics is the average age of your credit accounts. This means that opening a new account can drag the entire average down and have an adverse effect on your score. However, the effect will be reduced as months pass after you open it.