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7 Things You Didn’t Know Can Hurt Your Credit Score
By Martha C. White MONEY RESEARCH COLLECTIVE
Your credit score affects many aspects of your life from leasing a cell phone to renting an apartment or buying a home. It signals to lenders how reliable you will be as a borrower to pay the money back.
There are a lot of elements that make up your credit score. Aside from the well-known reasons that can hurt it — late payments, bankruptcy and foreclosure — there are a few things you might not realize are causing harm. Addressing these could help you fix your credit.
Here are some things that can have a negative impact.
Table of Contents
- Length of your credit history
- Late payments on “small” bills
- Paid charge-offs
- Maxing out your credit cards
- Not having different types of credit
- Closing a credit account
- A bunch of “hard pulls” on your file
1. Length of your credit history
A big part of your credit score pertains to how well you manage borrowing and repaying money over time. As a result, people with a new credit history — young adults, for example — don’t have as much evidence to prove their responsibility to lenders such as credit card issuers.
Likewise, people who have very little credit-related activity — described as “thin files” in industry jargon — are likely to have lower credit scores. They are also likely to have lower credit limits, which can make it hard to keep a low credit utilization ratio (see below).
However, don’t fret because your credit age will improve over time, and other beneficial factors have a greater impact on your credit score. Typically, seven years is the average age needed to establish a good credit history. Keeping your portfolio in good standing, even if you have a young account, will help overcome this.
2. Late payments on “small” bills
Many people don’t realize that late or missed payments on cell phone or cable bills can land their credit score in hot water, according to Lorenzo Varon, a Miami-based bilingual credit – HUD-certified housing counselor at Money Management International, a nonprofit credit counseling organization, and member of the National Foundation for Credit Counseling.
In reality, credit bureaus look at all facets of your payment history. These mistakes can have an outsized effect, especially for people who have a short record (see above) and have only new accounts.
Your payment history is the most important factor of your credit score because it takes up a large percentage on all major credit scoring models (35% of your FICO score and 41% of your VantageScore).
The amount of money you owe makes a difference — larger missed payments may have a stronger impact. However, all missed payments (even the small ones) have an effect, regardless of the bill.
In most cases, late payments can show up on your credit report once it is 30 days past due. Once there, it can stay there for up to seven years and affect your score for the whole time it’s there. If you do miss a payment, pay it as soon as possible because the longer you wait, the more it can drop your score.
3. Paid charge-offs
When creditors determine that they’ll never be able to collect on late payments, these accounts become “charge-offs” — debts the lender gives up on, writes off and sells to pennies on the dollar to a collections company.
Charge-offs can seriously hurt your credit score. Varon says that he has seen a single unpaid debt that goes to collections drive down a credit score by as much as 50 points. But did you know that these charge-offs continue to affect your credit even after you pay them?
It is possible to remove a charge-off from your credit report, depending on your circumstances. Once you pay the charge-off amount, it will still remain on your credit report for seven years, but it may have less of an impact as an unpaid one.
4. Maxing out your credit cards
Just because a credit card issuer gives you a particular credit limit doesn’t mean they want you to use all of it. Doing so can actually bring you down because of your credit utilization ratio — the percentage of your available credit you have used up.
When maxing out your cards, credit card companies see this as risky. People who tend to do so are less likely to repay their debt than those who don’t. The amount of credit card debt matters compared to your available limit. If you have a low credit limit, a credit card balance of $500 can affect your credit more than if you have a higher credit limit.
Perhaps counterintuitively, people with the highest credit scores tend to have low credit utilization ratios. Your credit score will benefit most if you can keep your credit utilization ratio at 10% or lower.
5. Not having different types of credit
While the amount of debt you carry is an important factor, so is the type of debt. Your credit score benefits if your credit mix has variety, though it makes up just a small percentage of your score.
Lenders want to know that you’re capable of handling different types of financial obligations, so having only non-revolving credit (such as a mortgage or a car payment), or just revolving credit (like a credit card account), will be viewed less favorably than a mix of credit that includes both.
Keep in mind that you shouldn’t open different accounts just to help your score. Only open credit lines you intend to use.
6. Closing a credit account
Some borrowers are surprised to find that, after they pay off a loan, their credit score actually dips a bit. While frustrating (paying off debt is supposed to be a good thing, right?) the logic goes back to how your credit report is calculated. Additionally, the dip should only be temporary.
Say you pay off a loan and it drops off your file as an active account. (It will stay in your credit history for seven years, though.) Once that account is closed, that credit limit no longer contributes to your credit utilization ratio. Also, if that was your only installment loan, having less variety in your credit report can also ding your score slightly.
This also goes for credit cards. You may want to close a credit card account that you don’t use or want anymore, but that could cause a hit to your credit score, especially if it is a card you’ve had for a long time and is in good standing. If the credit card in question is your oldest account, or you don’t have many other accounts, you may want to consider keeping the card open.
7. A bunch of “hard pulls” on your file
All sorts of companies can and do access people’s credit for reasons like marketing solicitations. These are referred to as “soft pulls,” whereas credit inquiries generated because someone applies to borrow money are called “hard pulls” or “hard inquiries.”
Soft pulls, which also include you checking your own credit, do not affect your credit score. Hard pulls for mortgages or car loans clustered within a short period of time — 14 to 45 days, according to credit bureau Equifax — are grouped together as a single inquiry, so the impact will be minimal (around five points, give or take).
But if you fill out credit applications for five different store cards on Black Friday to take advantage of one-day discounts, that could have a negative impact if you plan to borrow money in the near future, because each new credit card will count as a separate hard inquiry.
Since all of these issues can hurt your credit and stay on your report for several years, it might seem like a good idea to pay a credit repair company to help fix your credit, but the Consumer Financial Protection Bureau warns that some credit repair companies often over-promise and under-deliver in an advisory it published that includes red flags to watch out for if you want to hire a credit repair company.
There are many benefits to improving your credit, including increasing your chances of getting a loan, getting better interest rates on loans and credit cards, and boosting your credit score. There is no silver bullet that will instantly transform your credit, which is why Varon and other experts say it’s so important to be mindful of all the actions — even “small” ones — that can tarnish your history.
