7 Actions Hurting Your Credit Score
I started building my credit score by accident when I got my first credit card at 19. I say by accident because all I wanted when I walked into the bank that day was to open a checking account so I could deposit the $100 I saved.
However, I ended up leaving the bank with a; checking, savings account, and a credit card with a $500 limit.
I knew about checking and saving accounts; a credit card was foreign to me. I remember asking the personal banker what a credit card is and he simply said: “it’s just a card you use and payback monthly”.
That was the first and only lesson I ever got on using credit (cards).
Over time, I learned how to manage my credit card and built my credit score very quickly after only a two-year history. But first…..
What Is Credit:
You can consider the meaning of credit from two perspectives:
- The Lender
- The Borrower
From the lender’s perspective, credit is simply giving you the opportunity to purchase something today with the promise that you’ll pay for it tomorrow.
From the borrower’s perspective, credit shows how good (or bad) you are at keeping up with the said promise.
But lenders need proof to reference your ability to make good on your promise and borrowers also need proof to show they’ve been making good on their promises.
This is how we got credit reports.
What is a Credit Report?
A credit report is a record of your past borrowing and repaying including information about late payments gathered by the three major credit bureaus: Equifax, Transunion, Experian.
These credit bureaus collect credit and financial information about you and compile it into a report to produce a FICO (Fair Issac and Company) credit score.
The scores range from 300 to 850 with a higher score showing you to be more financially responsible.
According to Experian, here is how FICO credit scores are ranked:
Credit Score Ranking
Excellent – 850-800
Very Good – 799-749
Good – 739 –670
Fair – 659-580
Very Poor – 579 – 300
7 Actions Hurting Your Credit Score:
There are specific actions that impact your credit score negatively or positively. The longer your negative actions continue, the harder and the more time it will take to fix.
Similarly, the more positive actions you take, the higher your credit scores will become.
I’ve heard some personal finance experts say you: “don’t need a credit score or just pay for things in cash only.”
I don’t recommend that. I’m pro credit cards and believe everyone should have at least one – even if the card only has a $500 limit.
There are some big-ticket items where you’ll need to have a credit. For instance, when buying a property.
Besides that, credit can be an incredible wealth-building tool when managed wisely and used strategically.
Credit is your access to cash. This is why your credit score needs to be protected at all costs.
So what affects your credit score?
1. Missing or late payments:
Your creditor keeps a record of not only your loans but your payment history which is reported to the three credit bureaus.
Your payment history makes up 35% of how your credit score is calculated which is the largest percentage. One reported missed payment by your creditor to the credit bureau takes 7 years to fall off your credit report.
The longer a debt stays unpaid; 30, 60, or 90 days, the more negatively your score will be impacted.
2. Maxing out your credit cards:
Have you ever heard of credit utilization ratio?
If you’ve never heard of this ratio, don’t feel bad. Most people are either unfamiliar with it or understand how it affects their credit score overall.
Your credit utilization ratio plays a major role in how your FICO credit score is calculated and accounts for 30% of how your credit score.
The ratio simply measures how much revolving credit you’re using in comparison to your credit limit. The most common revolving credit limit is your credit card.
Scenario 1: Mya has a credit card limit of $5,500 and a balance owed of $750, she has a credit utilization ratio of:
$750 (balance owed) /$5,500 (credit limit) =13.6%.
Scenario 2: Mya has the same credit limit of $5,500 and a balance owed of $4,500, she has a credit utilization ratio of:
$4,500 (balance owed)/$5,500 (credit limit) =81.8%.
Your credit utilization ratio should be 30% or less. Based on the example, scenario 1 is an ideal ratio.
3. Shopping excessively for credit:
Every time you apply for credit, a hard inquiry occurs. Too many hard inquiries on your credit report within a short time frame will lower your credit score because it makes you look desperate for credit.
A lender may consider it as a red flag especially if those inquiries didn’t result in an approval with prior lenders.
Typically, it takes two years for hard inquiries to fall off your credit report.
4. Closing out old credit cards:
Most people start building credit via credit cards because they are easier to get and you can often start with a very low limit and increase it down the line.
Every time you close out an old credit card, it impacts your credit score negatively because it reduces your credit length.
Your credit length accounts for 15% of how your credit score is calculated.
I used to have Macy’s credit card when I was 20 years old. I stopped using the credit card for a while and Macy’s closed it out. Since it was one of my oldest cards, it reduced my credit history to 4.5 years instead of 10 plus years.
5. Opening up too many accounts in a short period:
This is closely related to applying for credit excessively. Opening up a lot of credit lines relatively quickly indicates that you’re about to take on new debt which is also a red flag.
Allow some time to pass before applying for credit.
6. Having more revolving loans in comparison to installment loans:
A revolving loan is a type of loan that allows you to withdraw and make payments repeatedly without going through the application process again.
There is no maturity date in most cases unless you or the lender closes out the account.
The payment varies monthly based on the amount you draw. The most common example of this type of loan are credit cards.
Installment loans, on the other hand, have a fixed payment and a final pay off date. As a borrower, you cannot withdraw on this type of loan multiple times. Some examples are car loans and student loans.
Having a mix of credit in your profile can help boost your credit score. A mix of credit accounts for 15% of how your score is calculated.
7. Bankruptcy, collections, short sales, or foreclosures:
This could be related to having a mortgage or any other personal finance issues like medical bills. Unfortunately, if any of the above is on your credit report, it could stay on your credit report for as long as 7 years.
In some cases, this can be avoided if you communicate with your creditor regarding any financial hardship beforehand.
It is harder to navigate your financial life with poor credit.
A poor credit score makes for an expensive life; because you will be stuck with undesirable interest rates which means you’re paying more in fees over time.
You also run the risk of not getting loans approved or always needing a cosigner depending on how bad your credit score is.
The sooner you start taking positive steps towards rebuilding your credit score, the better. Can you spot actions that are negatively impacting your credit score? How are you working on them?