6 Things That Can Hurt Your Credit Score
Your credit score helps creditors determine how risky it is to lend money to you. Borrowers who have a high credit score can get access to competitive financial products with the best terms because they’re considered low-risk consumers. Borrowers with low credit scores, on the other hand, may see higher interest rates or struggle to get approved for credit. Read on to learn about six factors that can drag down your credit score.
What is a FICO Score?
While there are many credit-scoring models, the FICO Score is arguably the most common. FICO credit scores range from 300 to 850, with 850 being the best possible score. Here’s a breakdown of the FICO Score ranges:
Credit scores are calculated using factors from your credit report, such as payment history, debt balances and the length of your credit history.
Why does your credit score matter so much?
Building and repairing credit isn’t just busy work. A high credit score can help you access lower interest rates and better loan terms. And the savings you gain from lower interest rates could help you afford other things like a comfortable retirement or travel.
According to a 2022 study by LendingTree, increasing your score from the “fair” range (580 to 669) to the “very good” range (740 to 799) could save you almost $50,000 on various debts because of interest savings.
Your credit score is critical to your financial health. Working to improve your score can reap significant dividends for your wallet.
6 things that can drag down your credit score
1. Late payments
Payment history is the factor with the most influence on your credit score. It makes up about 35% of the FICO Score calculation. As a result, missed payments can do terrible things to your score.
Pay close attention to this area. Always make at least the minimum payment on your credit cards and loans, and consider setting up automatic bill payments to avoid missing a due date.
If you’re having trouble making student loan payments, contact your loan servicer to discuss income-driven repayment, deferment or forbearance. Making such an arrangement can help keep your student loans in good standing when you’re short on cash.
2. Closing accounts
It’s always good to pay off debt, but you may want to think twice about closing a credit card account entirely when you no longer use it. Instead, think about putting it in the back of a drawer for safekeeping so you can keep the account open. Here are some ways closing accounts may cause your score to drop.
Closing accounts can increase your credit utilization. If you close an account that has a high credit limit, your available credit will decrease, which will increase your credit utilization (more on that later).
Closing accounts can shorten your credit history length. The length of your credit history is important as well, making up about 15% of your FICO Score. The longer your credit history, the better. Closing accounts, especially old ones, may shorten your credit history and lower the average age of your accounts.
Closing accounts can shake up your credit mix. Credit mix makes up around 10% of your FICO Score and is another area that could be affected if you close accounts. Creditors like to see that you are able to manage different forms of credit like revolving credit and installment loans. If you close your last credit card, you’ll no longer have as diverse a credit mix, which could drag down your score.
Knowing this about your credit mix isn’t cause to go out and buy a house, take out a new credit card or apply for a personal loan when you don’t need it. Just be aware that a portion of your credit score is influenced by the credit mix you have on your report.
3. Keeping high balances
Applying for and getting access to credit can be a good thing. But too much of a good thing can turn bad if you’re racking up a bunch of debt on a card. Despite making minimum payments, you may see your score take a hit if your credit utilization keeps climbing.
Credit utilization is part of the “amounts owed” factor of your FICO Score, which affects up to 30% of your score. Your credit utilization ratio is calculated by dividing your combined credit balances by your overall credit limit. The recommended maximum for credit utilization is typically 30%, but lower is better.
4. Errors on your credit report
You may be doing everything right, and then someone fraudulently opens a new credit card under your name and goes for a shopping spree on Amazon. An error could also pop up when a creditor incorrectly records a missed payment or a collections account belonging to someone else appears on your report.
Mistakes happen, and you need to watch out for them on your credit reports. The good news is that you have the right to dispute these errors. Each credit bureau lets you dispute items online. You can also submit your dispute by phone or certified mail. Under the Fair Credit Reporting Act, the credit bureau has to open an investigation into alleged incorrect or incomplete records. You can learn more about the dispute process here.
5. Excessive rate shopping
Shopping around to compare rates and terms for products is something savvy shoppers do. However, rate-shopping and applying for products to the extreme can hurt your score. If you’re new to credit, it’s best to go slowly.
However, the FICO scoring model does allow for a rate shopping period. Typically, any credit inquiries for the same product (for example, a mortgage or auto loan) made within a 14-day window only count as a single hard inquiry.
However, applying for every single credit card under the sun can dock you some points on the credit inquiries part of the equation, which can affect about 10% of your FICO Score.
6. Cosigning a loan
Cosigning a loan may be a nice gesture to help a child, relative or friend who’s having trouble qualifying on their own, but you should think twice before making this decision.
If the person you cosign for doesn’t make payments or defaults on the loan, the negative history on the account can damage your credit score. Plus, arguments over money and repaying debt can cause a rift in once-close relationships. Cosign with caution.
How to check your credit score and credit report
To see where you stand, you can check your credit score for free at LendingTree. Signing up for a LendingTree account also gets you access to useful tips and suggestions on how to improve your score.
You can order a free credit report from each credit bureau every 12 months at AnnualCreditReport.com. (Due to the COVID-19 pandemic, the three major credit bureaus are allowing free weekly access to your credit report through the end of 2023.)