Six Factors That Could Hurt Your Credit Score
It’s no secret that maintaining a good credit score is essential to strong financial health. It is a must if you ever wish to take out a substantial loan or need to apply for rental properties. Most people know the basics of what may hurt and what may help your credit score. For example, paying your bills on time will help your credit score, while filing for bankruptcy will hurt it. However, you may not know about a few surprising things that can hurt your score. Here are six factors that may negatively impact your credit score:
1. Having unpaid municipal debts – Municipal debts, such as parking tickets and library fines, are often minor, which is why some people often forget to pay them. Unfortunately, your city government may notify the credit bureaus about these unpaid municipal debts no matter how minor they are if they go unpaid for too long. Once they do this, these debts could potentially lower your credit score.
2. Not having any current loans – You would think that not having any loans would be a good thing, especially if you recently paid off any loans that you did have. It means that you’re practically free of debt, after all. However, credit scoring systems reward people who have different types of accounts. This is because the debt you have doesn’t always hurt your credit. If you make regular payments on time and in full on a loan, it will help your credit. It’s not uncommon for someone paying down a loan and a credit card to have better credit than someone who is only paying down a credit card.
3. Closing your credit card accounts – If you’ve been struggling with credit card debt and have finally managed to pay off one of your cards, then you may be tempted to close it. That’s a bad idea. Closing a card will remove that line of credit from your total credit, which will increase your credit utilization. For example, if you have two credit cards, one with a balance of $1,000 out of a $2,000 limit and one completely paid off with a $2,000 credit limit. With those two cards, you have a credit utilization ratio of 25 percent ($1,000 out of $4,000). If you close the card that you paid off, you lose that credit, which means now you are using $1,000 out of a total of $2,000 in available credit, leaving you with a credit utilization ratio of 50 percent. You’re much better off leaving the account open and making small purchases paid off each month, as suggested above.
4. Not using your credit cards – People will often pay with cash whenever possible instead of using their credit cards to avoid running up their credit card debt and the high interest rates that go along with it. However, only using cash to make purchases could end up hurting your credit instead of helping it. Credit card companies will stop reporting to credit bureaus after six months of inactivity on your card. They might also cancel your account, which would lower the amount of credit you have overall, thereby hurting your credit score. To avoid this, make minor purchases on your card monthly, and be sure to pay off your balance each month as well. Plus, you can be taking advantage of any cashback or other rewards that can save you money!
5. Doing anything that requires a credit inquiry – Any time a business looks into your credit history, it will generate a hard inquiry on your credit report, which will affect your credit score. While one or two inquiries overtime shouldn’t affect it by much, you must be aware of what kind of actions generate a hard inquiry. These actions include requesting a credit limit increase, applying for a loan, applying for a credit card, signing up for a cell phone plan, applying for an insurance policy, and more.
6. Not regularly checking your credit report – If you don’t regularly pull your credit report, you won’t know what is on there. Maybe you have some of those small municipal debts that you can quickly pay off. There could also be inaccurate or duplicate accounts that you need to have removed. If you don’t check, you won’t know what you need to do to raise your credit score. Most banks and credit reporting companies will provide you with a free credit report once per year.
Odds are you try to be diligent about maintaining good credit. Unfortunately, not everybody knows about all of the different factors that could affect your credit score. These are six surprising factors that could ding your credit if you’re not careful. Be sure to take advantage of options for receiving your credit report for free once a year, and stay on top of any adjustments you need to make to keep your credit healthy.