7 Things You Didn’t Know Could Hurt Your Credit 

We’ve all heard about the impact credit scores have on our financial lives. They are the gatekeepers to the best interest rates, great credit card offers, and even the cozy apartment you’ve been eyeing. It seems straightforward, right? Maintain a good credit score, and the financial world is your oyster. Yet, it’s not just about making monthly payments on time or keeping your credit card balance in check. Multiple other factors can make or break your credit score, nudging it in directions you hadn’t anticipated. 

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Key Takeaways: 

  • Credit utilization ratio: Keeping it low is crucial for a good credit score. 
  • Late payments and hard inquiries: Both can significantly lower your credit score. 
  • Maintaining old accounts: Length of credit history plays a pivotal role in your credit rating. 

Understanding Credit Utilization Ratio

We often overlook the power of the credit utilization ratio. This percentage, simply put, reflects how much credit you’re currently using against your total available credit. For example, if you have a credit card limit of $10,000 and you’ve charged $3,000, your credit utilization ratio stands at 30%. Financial advisors and credit card companies alike advise that keeping this ratio below 30 percent is a ticket to a high credit score. But why?

It boils down to risk. The major credit bureaus, like Equifax, translate a lower utilization rate as lower risk. They reason that individuals wielding their credit judiciously are likely to manage their financial obligations better. This perception could mean the difference between favorable interest rates and those that pinch your pocket. So, paying down those monthly payments and monitoring your line of credit could do wonders for your credit rating. 

The Dangers of Late Payments

Letting a due date for credit card payments or monthly payments on your auto loan or student loans slip by may seem minor. Yet, such lapses can have a lasting negative effect on your credit score. Credit card companies, utility companies, and even your landlord might report these late payments to major credit bureaus. The result? Your payment history, the most important factor in your credit rating (accounts for 35% of your FICO score), takes a hit. Remember, in the eyes of potential lenders and insurance companies, even a single missed payment can flag you as a higher credit risk. This, in turn, can hinder your ability to secure the best interest rates or even qualify for new lines of credit in the future. Timely payments ensure you maintain a good standing, keeping your financial health robust. 

The Effect of Hard Inquiries on Your Credit Score

We’ve all been there, considering a new auto loan, or maybe a line of credit for some much-needed home improvements. It seems like a good idea at the time. You fill out the application and wait for that approval, but did you know this action has consequences for your credit score? These are known as hard inquiries, or hard pulls, a necessary evil when you apply for new credit. Each hard inquiry might shave a few points off your FICO score. 

Why does this matter? Lenders and scoring models view these inquiries as indicators that you’re taking on new debt. It’s important to know that not all hard inquiries are treated equally. A new credit card application is looked up differently than a new credit card. So, while searching for the best interest rates or hopping on that shiny new credit card offer, remember, moderation and careful timing could save your score from taking an unnecessary hit. 

The Age of Your Credit Accounts Matters

We often hear that age is just a number. In the world of credit, however, the age of your accounts also plays a role. The length of your credit history forms a key part (about 15% of your FICO score) of your credit score mix, making it important to consider closing older accounts. Keeping old credit accounts open, even if they’re no longer in frequent use, can bolster the average age of your credit history, showing potential lenders your long-standing reliability. 

Closing these seasoned accounts might seem like a good housekeeping move, especially if you’re eyeing a shiny new credit card. Yet, this act can backfire, shortening your credit history’s length and possibly leading to a dip in your FICO score. It’s a nuanced balance, but maintaining old cards could be in your best interest for nurturing a high credit score. 

Credit Mix and Its Role in Your Credit Score

You may not have ever considered that the types of debt you have may play a role in your credit. But, it’s important to note that having a blend of installment debt (auto loans, student loans, mortgages, etc) and revolving debt (credit card accounts), plays an important role as it reflects our ability to manage different forms of debt. Your credit mix makes up about 10% of your FICO score.

High Balances and Their Consequences

If your credit score has ever taken a nose dive, carrying high balances could have played a part. Keeping high balances, relative to your credit limit, can wreak havoc on your credit utilization rate. This rate is crucial because it accounts for a significant portion (30%!) of your FICO score. 

Imagine using $9,000 out of a $10,000 credit limit across your credit card accounts. That’s a 90% credit utilization rate, far above the recommended 30 percent. Credit card companies and major credit bureaus view this as a red flag. It signals that you might be overextending yourself financially. This perception can lead to a negative effect on your credit rating, thereby impacting your ability to secure the best interest rates for loans or new lines of credit in the future. 

It’s not just about the numbers; it’s about maintaining financial health. By managing your balances and keeping them well below your limits, you safeguard your credit score and pave the way for more favorable financial opportunities ahead. 

New Credit Accounts: Proceed with Caution

Taking on several new credit card accounts, particularly close together, could signal red flags to potential lenders. This accumulation of new accounts triggers numerous hard inquiries from credit card companies. Each hard pull slightly dings your FICO score. Over time, these small hits add up, causing a more significant drop. 

Imagine this: you secured a shiny new auto loan, then several new credit card issuers extend lines of credit. Initially, it feels like a victory. However, these actions swell your list of things to manage, increasing the risk of missed monthly payments. Missing a payment due date, even on a seemingly minor bills, introduces negative effects on your payment history, a crucial factor in credit rating. Add to this a higher credit utilization rate from high balances, and watch your good standing with financial institutions wobble. 

Conclusion

Knowing what affects your credit score is a great first step when it comes to improving (and preserving!) your credit score. Sure, there are some things you can’t change overnight, like magically adding a decade to your credit history. But there are definitely choices you can make right now that’ll have a pretty swift impact on your score.

The trick is to get into the groove of good credit habits that match up with what credit scoring looks for, and then stick with ’em. Consistency is key for seeing that steady climb in your credit score over time.

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Kristen

Kristen is the founder and content creator at Mom Managing Chaos where she teaches busy moms how to simplify and organize their life and finances. She writes about frugal living, budgeting, productivity and organization.