It’s easier to unknowingly wreck your credit score than you think. Last week Peter went on a rant about the credit bureaus and how they really work after learning about a troubling ordeal a friend of ours had to endure. It inspired me to look into ways people can accidently hurt their credit score. I found these top 10 ways that you’re deducting points from your FICO score without realizing it.
1. Department Store Credit Card
We’ve all been there at that moment when you are checking out at the register and the store clerk offers an extra 10% discount for signing up for a store credit card; just say no. First off opening a new credit account initiates a hard credit check and will lower your score instantly. Studies have shown that no matter the best of intentions people who open store credit cards typically will end up buying more and have a high likelihood of carrying a balance on these cards. Store cards typically charge high interest rates. Overall it’s a lose lose situation – except of course for the store.
2. High Balances
Having high balances on your credit accounts – relative to your available credit – will have a very bad impact on your credit score. Nearly 30% of your FICO score and nearly 43% of your VantageScore is determined by the ratio of your debt and your available credit. This ratio is known as your Credit Utilization Ratio. Having a high ratio is bad while the lower the ratio the better it will be for your credit score.
3. Closing Credit Accounts
In the battle to pay off debt the first thing you want to do after sending that last check off to the bank is to go and close the account and put that debt behind you. It turns out in the crazy world of high finance closing that account you just worked so hard to pay off will also hurt your credit score. Closing the account will reduce your amount of available credit throwing your Credit Utilization Ration out of whack and a portion of your FICO score is determined by the length of your credit history so closing an account ends up shortening the length of time you have had credit.
4. Having a Zero Balance
This is one that irks me a lot, you would think that having credit available but keeping your balance at zero would be a good thing but in the credit industry it’s actually viewed as a bad thing. Having a low Credit Utilization Ratio is great – the golden standard is 10% and keeping it under 35% is needed for it to have a positive effect on your credit score – but if the ratio is zero it will negatively impact you. The thinking behind this is that the banks want to see that you can be responsible to regularly use and pay off your debt but when you don’t use any they have no way of knowing how you would act if you started using debt.
5. Disputing Credit Card Transactions
If you feel that you have fraudulent activity on your credit accounts it is essential for you to report it ASAP; however, when you do there is a very good chance the issuing bank will stop reporting that account while they investigate. Makes sense they don’t want to be reporting charges and usage that isn’t yours but when they pull it then that has the same effect on your credit score as if you had closed the account – see #2 for more details. Of course this effect is only temporary while the investigation is being conducted but nonetheless it will still be a negative impact. You will want to give yourself at least 60 days before going out and applying for a new credit account after having a dispute on file.
6. Purchasing a Cellphone Plan
When you switch cellphone companies and want to start service they will run a hard credit enquiry prior to granting you a new account. In fact this is something that will happen typically with any utility – phone, electricity, gas, water, cable – anytime you have a product or service that will be provided for you first and then you pay for it, you are essentially being given credit by the company and so they will require a credit check before opening a new account.
7. Purchasing New Auto Insurance
Right in line with number 5 when you are switching insurance companies it is very likely they will do a credit check. Having a good credit score can help you lower your monthly premiums be sure the savings will be worth another hit on your credit score.
8. Negotiating a Lower APR
Calling your credit issuer and working out an arrangement to lower the interest you are paying is always a good thing you also need to be aware that when you do this they will likely run a credit check. In addition sometimes the arrangements you make could lead to the issuer lowering your available credit down the amount of your balance. If your available credit is lowered then it will negatively affect your Credit Utilization Ratio.
9. Student Loans
Receiving higher education is a great asset to have in the job market just be mindful of how your student loans will affect your credit score. Typically these types of loans are done is disbursements such as on a quarterly or semester schedule depending on your school. What this means is that each of these disbursements appear on your credit report as individual loans. So under a semester system and 4 years of college you could end up will your one student loan showing as 8 different credit accounts on your report. After graduation doing a consolidation would take care of the problem but in the meantime it will still be hitting your score.
10. Getting a Motorcycle
Here’s another one that makes no sense and seems pretty unfair, motorcycle loans are typically not categorized as vehicle loans – even though they are vehicles – but rather as revolving credit loans. This means spending $10,000 on a new bike and maxing out your Visa card will look the same when calculating your credit score.
Knowledge is power and while some of these activities are difficult to avoid you can at least be fully informed when making your financial decisions.
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