If you know what hurts your credit score and you never miss a debt payment, you probably have a decent credit score. But if you want to push it even higher, you’ll need to watch out for common misconceptions about what actually lowers your credit score.
Even if you’re generally responsible with money management, you might inadvertently be doing things that lower your credit score. Here are some financial decisions that seem benign, but could damage your score.
What hurts your credit score?
1. Using cash or debit instead of credit
Paying with cash or debit will always cost less than paying with credit, since you’ll avoid interest.
But as Liran Amrany, co-founder and CEO of personal finance app Debitize, points out, using debit could be a missed opportunity.
“You’re staying out of debt, which is great, but you’re also not taking advantage of the easiest and fastest (and free) way of building your credit score,” he says. “Even just putting one monthly bill on a credit card and setting it to autopay will go a long ways to improving your credit.”
2. Avoiding debt altogether
Staying debt-free is a worthy goal, but avoiding debt altogether means delaying the chance to building credit. In fact, having no credit can be almost as bad as having poor credit.
“People perpetually delay dealing with credit until they think they’ve gotten to some point where they have more money or a better job,” says Lee Gimpel, co-creator of The Good Credit Game.
However, “building a good credit score comes from a responsible pattern of using credit — and a longer history of years is better than a short history of a few weeks or months,” he explains.
“You’re better off to get a credit card today and use it versus wait for years, until right before you want to buy that house or car,” Gimpel adds. Otherwise, you could get rejected for rentals or loans when you need them due to a lack of credit.
3. Not having different kinds of debt
Any loans or credit cards that you use to responsibly borrow and repay debts can help build your credit. But the more types of accounts you have open, the richer your mix of credit, which can help boost your score.
“Having credit cards is good, but a lender is going to want to see that you can handle a mix: loans, credit cards, lines of credit, etc.,” says Josiah Nelson, a credit expert and author. In addition to getting a credit card, he suggests secured loans as a good way to build credit.
“The optimal number of accounts to have on your report is around 10 — mixed up between loans and cards,” Nelson says.
Just make sure you wait three to six months between opening new credit accounts and keep your credit utilization low.
4. Closing your oldest credit card account
Maybe there’s a card you haven’t used in a while, or you’ve finally paid down the balance and you’re anxious to just get the card out of your life. If you’re thinking of closing your account, you may want to reconsider.
Proceed carefully — closing a credit account can actually hurt your score, says Alex Gerard, CEO of credit card advisory service CardsMix. “It is quite counter-intuitive that this action can cause a dip in your credit score,” Gerard says.
“In the FICO model, the length of the credit history makes [up] 15 percent of your credit score,” Gerard points out. “That means that if you close an old credit line, both the average age of accounts and the oldest account age is taking a hit, decreasing your credit score.”
5. Reducing your credit limit
Another way to help your credit is to keep your credit card limits high, which helps you maintain a favorable credit utilization ratio.
When you close a credit card, for example, “you now have less total credit lines outstanding [and] it may increase your utilization, which makes up 30 percent of your FICO score (lower is better),” says Amrany. That’s yet another reason to leave a credit card open, to help keep limits high.
That’s also why it’s a mistake to decline your bank’s offer to increase to your credit limit. “Some consumers think it’s a smart move to just simply decline the offer altogether,” says Susan Chung, managing director for Smart Lawsuit Funding.
Resist the urge to increase spending when your credit limit increases, Chung warns. If you do this, accepting a bump can help improve your credit utilization.
6. Applying for new credit
Applying for and opening multiple new credit accounts within a short period is an action that many consumers might not be aware can hurt their credit.
“People may think that it is harmless to apply for as many cards as they can,” says Nelson.
However, a consumer who is seeking a lot of credit at once will make a lender worry that they are overextending their finances and borrowing more than they can afford. “As a credit analyst, if I see someone applied for 10 cards before ours, I’m most likely going to go ahead and deny their application,” Nelson says.
7. Shopping around for insurance and other services
Consumers looking for deals on car insurance and other services will often shop around and compare quotes. But here’s what lowers your credit score: Do it too often and it can look bad on your credit history.
“In order to provide you a finalized quote, insurance companies will run your credit,” points out Raymond Weiss, a CFP, licensed insurance agent, and blogger at The Ways To Wealth. “This is considered a hard inquiry.” Credit inquiries get recorded on your credit history, and too many can lower your credit score.
“What’s best is to choose one time a year and shop within a 30-day window,” Weiss suggest. “If you’re shopping within a 30-day window, the credit reporting agencies will consider this just one hard inquiry, no matter how many companies you get quotes from.”
8. Not checking your credit
Too many hard inquiries from lenders can be damaging to your credit. Because of this, says Nelson, some consumers think it could also damage their credit when they pull their own reports.
“This is a myth,” he says. Credit inquiries you originate are classified separately from those initiated by lenders or servicers. “In reality, you could pull 100 copies of your own credit report, and as long as a creditor didn’t initiate the inquiry, it will not be listed as an inquiry,” he explains.
Checking your annual credit report is an important part of maintaining a good credit history. You can catch mistakes and signs of identity theft early on, and reviewing your report might give you some ideas on how you could further improve your credit score.
Now that you know what hurts your credit score, you can take steps to change your habits and improve your score. Want to learn more? See exactly how your credit score is calculated.
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