Most credit consumers know fully well that not paying a credit card bill or other loans on time can hurt their credit score. And that foreclosures, bankruptcies and loan defaults can wreak havoc on a credit profile.
But there are other much more subtle practices that could lower your credit score, and you may not even know it.
Here are some important score-lowering factors to avoid:
Keeping card balances too close to available credit. This is a big factor. If you’re credit card limit is $5,000, and you keep a balance over $4,000, then that proximity to your limit is going to hurt your score. Overall, having a low “credit utilization ratio” (having a large amount of credit available to you and utilizing only a little of it) is better for your credit score. Keep in mid, you can maintain a robust credit card utilization by using your credit card regularly — and paying off your balance every month, or paying most of it off.
Too many new credit cards or other loans. Credit reporting agencies average the ages of your open credit cards, mortgages, auto loans, student loans and other lines of credit. If your credit history can be traced back over many years, as opposed to months, lenders have more information on which to build a healthier creditworthiness profile. Having good credit for a longer period of time also indicates that you have been able to successfully maintain credit cards and pay off installment loans on a regular basis. For this reason, closing your oldest credit card account is usually a bad idea that could hurt your score.
Not using enough credit. Not enough credit, or not using your credit cards at all, can actually hurt your credit score. This concept may run up against smart financial strategies by many Americans aimed at staying debt free. Inactive credit card accounts could be closed by the lender over time. It may not seem fair, but every consumer at one point or another needs a healthy credit score generated by smart usage of existing credit. Even if you want to secure a rental apartment, the landlord will look at your credit score. The best way to overcome this problem is to use some credit cards for certain expenses, and paying off all or most of the balances in one to three billing cycles. Always keep an eye out for card rewards programs and interest rates when using your cards — even sparingly.
Incorrect information on your credit reports. It may be hard to believe that this still happens, but it does. Even though all U.S. consumers are entitled to one free credit report a year from each of the three major credit reporting agencies (they can be obtained at annualcreditreport.com). Errors on credit reports can include loan accounts that you never owned, and they can include negatives marks such as late payments. More common errors may involve wrong home addresses or occupations. But you won’t know for sure until you dig up your reports. Correcting errors can be challenging, but it can definitely be worth the effort. At the very least, you should pull a report once a quarter. Also, keeping an eye on your credit score on a monthly basis is much easier to do now that most major credit card providers offer free access to customers’ credit scores.