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7 Things that can hurt your credit score

Daphné Leblanc • June 24, 2022

Your credit score is essential. A high credit score may indicate that you’re a low-risk borrower who can get a loan at a good interest rate. A low credit score can mean you won’t be approved for a loan, or that you’ll have to pay a high-interest rate. The thing is, if you’re like most people, you probably don’t think about your credit score until you need to borrow money. Your credit score is a measure of how responsible you are with debt, and it can impact everything from the interest rate you pay on a mortgage to whether or not you can rent an apartment. 

While there’s no way to guarantee a perfect credit score, it is possible to keep tabs on some of the things that can hurt your credit and make it harder to access money for borrowing. So, what can hurt your credit score?  Here are the top 7 things to watch out for when it comes to establishing, maintaining, and improving your credit.

 

Late payments

Late payments are probably the most obvious thing that can hurt your credit score. If you have a missed payment and are more than 30 days late on a payment, it will show up on your credit report and lower your score. In fact, even one missed payment can drop your score by up to 100 points.  

Once an account is delinquent, it can continue to hurt your credit score even if you bring the account current. In addition, late payments can result in additional fees and charges from your creditors. If you’re having trouble making ends meet, contact your creditors as soon as possible to arrange a payment plan. By taking action early, you can avoid damaging your credit score.

Another thing to keep in mind is that late payments remain on your credit report for up to seven years. This means that if you have a late payment from five years ago, it will still be visible to potential lenders. If you’re hoping to improve your credit score, one of the best things you can do is make sure all of your payments are made on time. While late payments will eventually fall off your report, timely payments will help to improve your score in the meantime.

 

Maxing out your credit cards

When you’re trying to build or repair your credit, using a credit card can be helpful. That’s because part of your credit score is based on your “credit utilization ratio,” which is the amount of credit you’re using compared to the amount of credit you have available. 

In general, it’s best to keep your credit utilization below 30%. What does that mean exactly? Imagine you have a credit card with a $1,000 credit limit: You should aim to keep your credit card balance below $300 (or 30% of $1000). 

Many people make the mistake of thinking that they can max out their credit card each month and still maintain a good credit score. In reality, this can hurt your score. That’s because regularly reaching your credit limit signals to lenders that you’re struggling to manage your debt. As a result, it’s best to keep your balance well below your credit limit to improve your chances of qualifying for loans and other lines of credit in the future.

 

Closing old credit card accounts

Many people assume that once they no longer need a credit card, the best thing to do is to close the account. Though it seems like a smart way to manage credit, this can actually damage your credit score. 

Active accounts are generally seen as more favorable by creditors, so closing an account can have a negative impact. Additionally, closing an account will lower your credit utilization ratio, which is the amount of debt you have compared to your credit limit. A lower ratio is generally better for your credit, but closing an account can suddenly reduce your available credit, thereby raising your ratio. In short, it’s usually best to keep old credit cards open, even if you don’t plan on using them.

 

Applying for too many credit cards at once

Most people in the United States have an average of four credit cards, but it is important to watch how many you open at a time. Opening too many credit cards within a short time span can negatively impact your credit score. 

Why? Because lenders view multiple inquiries as a sign of financial instability, which can lead to higher interest rates and decreased chances of approval for loans and lines of credit.

Additionally, one of the factors used to calculate your credit score is the number of hard credit inquiries on your report. Inquiries occur when you or a lender requests your credit report, and each inquiry can slightly lower your score. So, if you are considering opening several credit cards within a short period of time, it’s important to weigh the benefits against the potential impact on your credit score. In most cases, it’s best to open only a few new lines of credit every year.

There are three main types of credit inquiries: hard inquiries, soft inquiries, and business inquiries. 

  • Hard inquiries occur when you apply for new credit and happen when a lender checks your credit report to determine whether or not you’re a good candidate for a loan or credit card. 
    • These have the biggest impact on your credit score because they show that you’re actively trying to get new credit. This can be a red flag for lenders, who may view you as more likely to default on a loan.
  • Soft inquiries occur when you check your own credit score or when a lender checks your report for pre-approval purposes. 
    • Don’t fear soft inquiries! They do not affect your score because they don’t indicate that you’re seeking new credit.
  • Business inquiries occur when employers check your credit report as part of the hiring process.
    • Business inquiries also have no impact on your score, but they may be noted on your report so that potential employers can see them.

 

Having a high debt-to-income ratio

Understanding how credit works is essential to maintaining a good credit score. One important factor similar to credit utilization (discussed above in “Maxing out your credit cards”), is the debt-to-income ratio. This ratio measures the amount of debt you have compared to your income. Lenders use this ratio to determine whether you can afford to take on additional debt. 

Imagine, for example, your monthly income is $3,000 and you have $600 in monthly debt payments. That would put your debt-to-income ratio at 20% (or $600/$3000). Most creditors want to see a debt-to-income ratio of 40% or less, so you would be in good shape here.

It’s important to remember, that even if your credit utilization is low, having a high debt-to-income ratio can hurt your chances of getting approved for new credit.

 

Having no credit diversity

Credit diversity is an important factor in determining your credit scores. Having a mix of different types of debt, such as revolving debt (e.g. credit cards) and installment debt (e.g. student loans), can help to improve your credit scores. This is because it shows that you are capable of managing different types of debt responsibly. 

Having a diverse mix of credit can positively impact your credit scores for several reasons. First, it shows lenders that you’re able to handle different types of debt responsibly. Second, it can help improve your “credit mix,” one of the factors that goes into determining your credit score. 

Having a diversified mix of credit can help you get better interest rates on future loans since lenders will see you as a low-risk borrower. So if you’re looking to improve your credit scores, consider diversifying your credit mix. It could give you the boost you need.

 

Not having any credit history

A lack of credit history is one of the biggest barriers to building credit in the first place. Everyone needs to start somewhere, and it isn’t always easy. 

More than 45 million Americans are estimated to be living without a credit score, either because they have no credit history or they have scores so low and outdated that they are deemed unscorable. The lack of credit can make it difficult to get approved for a loan or a new credit card, as lenders have no way of evaluating your borrowing risk. Not having a credit score can also make it harder to rent an apartment or get utilities turned on in your name.

For many people, establishing credit can feel like a chicken-and-egg scenario. Lenders are often unwilling to extend credit to individuals with no history of borrowing and repaying debts, but it can be difficult to build up a credit history without access to credit. 

There are, however, several ways that “credit invisible” individuals can begin to establish a positive credit history. One option is to open a secured credit card, which is backed by a deposit that the cardholder makes upfront. Another option is to sign up for a rent reporting service, which will report the renter’s on-time rental payments to the major credit bureaus. By taking these steps, the credit invisible can start on the path to becoming credit visible.

 

Bonus: Not checking your credit report

There’s an old saying that ignorance is bliss. But when it comes to your credit report, that’s not the case. 

Checking your credit report regularly is essential in creating a healthy relationship with your credit. By doing so, you can catch any errors or potential red flags early on and take steps to correct them. Additionally, regularly checking your credit report can help you identify any fraudulent activity, such as identity theft. Although it may not be pleasant to think about, monitoring your credit report is an important part of maintaining good financial health. So while ignorance might be bliss in some cases, knowing what’s on your credit report definitely isn’t. You can easily request a free credit report from the three major credit bureaus, Experian, Transunion, or Equifax.

Remember, no one is immune to credit score drops, and many things can go wrong when it comes to credit. If you stay aware of the key factors that can hurt your credit score, you can take steps to protect it and keep it high. By monitoring your credit report regularly and being proactive about maintaining a good credit history, you can rest assured that your hard-earned credit rating will be there when you need it. 

Want more credit tips for renters? Check out our Credit Education resource center!