Your credit score is one of the most important factors in your personal finance life. A bad credit score can make it impossible to get approved for a loan, to get good insurance rates, or even to get a job sometimes.
Knowing what can hurt your credit score can help you keep your credit score in good standing.
These Factors can Hurt your Credit Score
While we all know life happens and we can’t control it sometimes, there are certain factors you can prevent from hurting your credit score. Here’s what you should know.
Paying your Bills Late
This is the number one killer of any good credit score. Paying your bill late can hurt your credit score more than anything else. Your payment history makes up 35% of your credit score, which is the largest percentage.
The credit bureaus consider your bills late when they are over 30 days past due. This means on day 31 if you haven’t paid your bill yet, the credit bureaus report it as late. It will show up on your report as a 30-day late and it can hurt your credit score considerably.
The late payments are then counted in 30-day increments. If you don’t pay your bill by day 60, you’ll have a 60-day late, and by day 90, you’ll have a 90-day late. The later the bills are paid, the more it hurts your credit score.
How to Fix It:
Pay your bills on time as much as possible. If you can’t pay your bill on time, talk to your creditor. They often have payment arrangements or programs they can put you on that won’t require them to mark your payment late and hurt your credit score.
Charging too Much
Your credit cards are there to use, but if you overuse them, it can hurt your credit score. Ideally, you shouldn’t have more than 30% of your credit line outstanding at a time. This means you shouldn’t have a balance of over $300 for every $1,000 credit line you have.
If you charge too much, your minimum payment increases, and you become a higher risk of default. The credit bureaus decrease your credit score as a result because you’re not as good of a credit borrower with a high credit balance.
How to Fix It:
Only charge what you can afford to pay off in full. Your credit card shouldn’t be an extension of your income. Instead, use it wisely to protect large purchases or to pay for items that you can’t pay for in cash, like airline tickets or hotel stays.
If you have to carry a balance, keep it at 30% or less of your total credit line.
Lowering your Credit Limit
If you or your creditor lower your credit limit, it could hurt your credit score. While it might seem like the responsible thing to do so that you don’t overspend, it can hurt your credit utilization rate if you have any outstanding debt.
If you have credit cards with balances and you lower the credit limit, it increases the ratio of the amount you have charged to your credit limits. Your credit utilization rate is the second largest portion of your credit score, so this can hurt quite a bit.
How to Fix It:
Don’t lower your credit limit yourself and keep your account in good standing to ensure that your creditors don’t lower it for you. This means only charge what you can afford to pay off and always pay your bills on time.
Closing a Credit Card Account
Closing an old credit card account may seem like a good idea so you don’t use it anymore, but it can actually hurt your credit.
A part of your credit score is your credit’s age. The credit bureaus take an average of your credit accounts’ ages. If you close an old account, it lowers the age considerably.
This can help in two ways:
- You will keep your old credit age which can help your credit score
- It increases your total credit lines available, which decreases your credit utilization rate, helping your credit score
How to Fix It:
Don’t close old accounts. If you have credit cards you’ve paid off and no longer want the temptation to use, lock them up. This way you keep them open but make them harder to use. Place them in a safe in your home or even your safety deposit box at your bank. When they’re out of sight and out of mind, you’re less likely to use them.
Collections and Charge-offs
Creditors can send a charge-off your account and/or send it to collections if the account remains unpaid for a long period.
Most creditors give you a chance for 120 days, some a little less. They’ll use their own collection efforts to try to get you to pay your debt within that time. Even if you can’t pay the full amount, working with them on a payment arrangement can help avoid collections or charge-offs.
If you don’t pay, they’ll charge it off and sell the debt to a collection agency for pennies on the dollar. This does three things:
- Your credit score falls drastically for the late payments. Every 30 days your payment is late hurts your credit more.
- Your credit score falls drastically for the charge-off because it shows that you didn’t do anything to make good on your debt.
- A collection is a new tradeline on your credit report that negatively affects your credit score. Collections stay on your credit report for 7 years, making it hard to get new credit in that time.
How to Fix It:
If you get behind on your bills, talk to your creditors. They are often willing to work with their customers because they’d much rather have a payment arrangement than you not pay your bill at all. Be honest with them about your financial situation and work out a plan so that you can avoid your account going to collections.
Errors on your Credit Report
Did you know that errors happen all the time on credit reports? Sometimes it’s the fault of the creditor and sometimes the credit bureau. It could be human error or just oversight, but either way, they can hurt your credit score.
Sometimes errors also occur because of fraudulent activity on your account, so it’s important to check your credit reports often.
Everyone gets free access to their credit reports here. Normally, they provide one free credit report for each credit bureau annually, but since the pandemic, consumers can get free weekly credit reports.
Choose a frequency to pull your credit reports to check for errors. Even if you pull them once a year, make it a habit to look for inaccurate information that could hurt your credit score.
How to Fix It:
If you find errors on your credit report, file a dispute with the credit bureau reporting it (Trans Union, Experian, or Equifax). Your dispute should include the name of the creditor, the account that is in error, the details for the error, and any proof you have to prove otherwise.
The credit bureaus have 30 days to respond to the dispute, so check back in 30 days to see the resolution. You can also go directly to the creditor if you think the error was made on their part, but always follow up.
Carrying too Much Revolving Debt
Revolving debt is credit card debt. If you only have credit cards and no installment debt, such as a personal loan or car loan, it can hurt your credit score.
Here’s why.
Lenders like to see that you can handle all types of credit including credit cards with a revolving balance and installment debts with fixed payments. If you have all credit card debt, you don’t show the credit bureaus that you can balance both revolving debt and a fixed loan amount debt.
How to Fix It:
Apply for an installment loan along with a credit card or two. Don’t overdo it in either category but make sure you have a good mix of both with a solid payment history to prove you can do it.
Key Takeaway
Avoid bad habits when it comes to your credit to prove to lenders that you are a good risk. Pay your bills on time, don’t overextend your credit, avoid collections, and have a good mix of credit as much as possible. Keep your credit accounts open and handle them right and you’ll have a good credit score.
