Simple actions you take can add up to hurt your credit score. What you might not realize is that many common things you do in life affect your credit. Having an excellent credit score is important because it makes your financial life so much easier. You’ll be able to take out new loans, buy a home or car, open new credit cards, and get better interest rates through it all.
We’ve put together a comprehensive list of mishaps that hurt your credit. Become more aware of what might ding your credit so you can make good choices for your financial future. And, if you’ve already experienced a score drop, this list can help you understand how you might recover your score.
What makes up a credit score?
Knowing what makes up your score will help you as you review our list. A credit score is the numerical representation of your credit history and your financial strength. The most used credit score formulation is the FICO score which is broken down into these factors:
- The number of accounts you have
- The types of accounts (revolving verses installment)
- Your debt compared to your available credit (called your credit utilization)
- The length of your credit history
- Your payment history
That Hurt your Credit Score
1. Credit Reporting Errors
Mistakes made on your credit report really can hurt your credit score. Errors can be made by your creditors or even the credit agencies themselves. Even worse, identity theft can cause big trouble in your credit report. Read our article on common errors and how to correct them.
TIP: Avoid having your credit score plummet by monitoring your report regularly. You can get a free copy of your report each year through annualcreditreport.com. If an error is made, make sure to dispute it through the creditor and the credit bureaus themselves.
2. Utility Bills
Electricity, water, sewer, gas, oil, and garbage bills are all considered as utility bills. Just like all debt, make sure you are on top of making payments on time. If you miss payments and you end up in collections, your score is sure to take a substantial hit and can really hurt your credit score.
3. Medical Bills
Often medical expenses take us by surprise. It can be challenging to pay these bills but if you expect to have difficulty, contact the medical billing department to discuss payment options. It is better to keep these bills out of the hands of a collection agency.
4. Paying off a Loan
No, we aren’t fooling you. While you may think paying off one of your loans is a good idea, just make sure you consider a few things.
First, think about what types of loans you still have after you’ve closed the account. Part of good credit is having a good mix of loan types – such as revolving loans (credit cards) and installment loans (auto or mortgage loans). If you pay off an auto loan and its the only installment loan you have, your credit will suffer.
Second, if you pay off a credit card but your remaining cards are high, your credit could drop. This is because a big part of your credit score is based on your credit utilization ratio, which is the amount of debt you have versus your credit limit. Make sure if you pay a debt that the account and available credit stays open.
5. Child Support Obligations
Unpaid child support is bad for your credit. It is considered an unpaid debt and can be reported to the credit bureaus.
6. Closing a Credit Card
While sometimes it might seem wise to close a credit card, think twice. When you close a credit card, you are lowering the amount of your available credit. Thus, your credit utilization (we talked about this above) will be affected and thus your score.
7. Credit Limit Increase
When you ask a creditor to consider increasing your credit limit or lowering the interest rate on your credit card, your credit will be pulled. Again, just be mindful of how many of these inquiries are being done.
8. Insurance Policy Application
While you may be aware when you apply for new loans, that creditors pull your credit which does affect your credit score. You may not realize that when you apply for an insurance policy, a hard inquiry is done. Too many of these inquiries and your score will drop.
9. Cell Phone
Again, like insurance applications, when you take on a new cell phone plan, a hard inquiry is done to ensure you will be able to pay your cell phone bills. Just be aware that too many inquiries are not good for your credit health.
10. Renting a Car
If you are in need of renting a car, think before you pay. These days, you may opt to use your debit card more often. But, in the case of renting a car, don’t use your debit! Many car rental companies have a policy that they will check your credit via a hard inquiry if you choose to pay by debit card. Make sure you read the fine print. Choose to use your credit card in this case.
11. Past-due Rent
When you are unable to pay your rent on time, your landlord can put your debt into the hands of a collection agency. When this agency reports this to the credit bureaus, it’s considered as delinquent. This is a serious ding on your credit. Have a conversation with your landlord if you find you are having trouble and work out a plan.
12. Moving Debt to a Single Credit Card
You might be tempted to accept a 0% interest rate balance transfer offer. Keep in mind that by opening new credit, your score may drop. New accounts do factor into your credit score. Your score may be lowered only a little so we aren’t saying you shouldn’t do it. But make sure you are thoughtful in the timing of it and what other kinds of activity you are doing. You want
13. Gym Memberships
Joining a gym is good for your physical health but be wary about your financial health. Gyms often do a hard inquiry to see if you’ll be good to make payments. And if you decide not to go to the gym anymore, please make sure you terminate your gym contract.
14. Bank Overdrafts
If you opt for overdraft protection, this essentially is a line of credit. Just make sure you pay any debt you incur using it.
15. Debt Settlement
Credit counseling itself may not affect your credit. However, if you elect to sign up for a debt management plan or settle your debt, this can have hurt
16. Applying for too many lines of credit
If you apply for too many credit lines in a short time period, you can be sure your credit score will drop. This is not only because of all the hard inquiries that are processed when you open the accounts, but it’s going to shorten your length of credit history. Just be cautious and only open what you need when you need it.
Credit inactivity is when you don’t use a credit card for a period of time. You might think that you are improving your finances by not accumulating debt. However, contrary to what you think, accumulating some debt on all your outstanding credit is a good thing. If you infrequently use your card, you could be at risk of the credit card company closing your account due to inactivity.
18. Law Enforcement Tickets
Sometimes these are the bills we might delay in paying. Nobody likes the unexpected traffic citation or parking ticket. However, if you delay too long or forget to pay your these, your town or city may take action. If they send your debt to a collection agency, they will notify the credit bureaus. Collections can significantly decrease your score sometimes up to 100 points.
19. Library Fees
Just like other debts, the small fees (or sometimes large) that a library imposes can affect your credit. If unpaid, library fees can wreck your finances even if just a small amount. Return on time and pay your fees!
20. Tax Obligations
If you don’t pay the tax man, your credit will suffer. Since the Internal Revenue Service is a federal agency though, there are procedures in place to help protect your credit. If you work with the IRS and arrange installment payment plans that you are able to meet, your credit won’t be adversely affected. You’ll receive plenty of warning before your credit drops so just take action.
As you can see, there are numerous factors that make up your credit health and it is wise to be knowledgable on what affects your credit report. Take some precautions by recognizing these things so you can choose what, when, and how you do