5 Surprising Ways You Can Hurt Your Credit Score
Everyone knows that missing a payment can hurt your credit, but did you know that applying for credit can also lower your score?
Behavior like missing your payments is widely known to be bad for your credit score, but there are many ways you can hurt your score—some of which are a little less well-known. We rounded up five things that are pretty common behaviors, and one that, quite honestly, is just really annoying.
1. Getting a credit card charge-off.
You know missing payments is bad, but you may not have realized how bad it can get. Miss too many credit card payments and the credit card company will decide you aren’t likely to ever make those payments. That’s when they hit you with a charge-off.
When you account is charged-off, it basically means that it’s been shut down. You will no longer be able to use that card to make purchases, take out cash advances, transfer balances, etc. However, you will still definitely be liable for paying back the charged-off balance. That credit card has turned from a useful financial tool into nothing more than a chunk of debt that you have to repay.
Your credit card company will report the charge-off to the credit bureaus, and the information will remain on your credit report for seven years—starting from the date that you first became delinquent on the account.
That charge-off will cause your credit score to drop—and it won’t be a tiny drop either. Payment history is the single most important part of your credit score; it makes up 35 percent of your total. Luckily, your score will improve over time—assuming that you continue to make all your payments on time—but that first drop will be a rocky one.
2. Applying for more credit.
When you’re trying to get a new loan or credit card, most legitimate lenders will want to perform a credit check before determining if they’ll lend to you. That’s because your credit score is seen as an indication of your likelihood to pay back any money you borrow. But not every credit check is the same; some are hard credit checks while others are soft credit checks—and they affect your score in totally different ways.
With a hard credit check, your entire credit report is pulled for the lender to examine. These checks are themselves recorded on your credit report—and since they represent an instance of looking for new credit, they can cause your score to lower. (For more, check out how “new credit inquiries” factor into your score.) You have to give permission before a lender can run a hard check.
Soft credit checks, on the other hand, do not require your permission before they can be run. However, they also don’t return nearly as much information. They’re not a full deep dive into your credit history; they’re more like a summary. They also aren’t recorded on your credit report and do not affect your score. These checks can be run by anyone. If you’ve ever received a “pre-approved” loan or credit card offer in the mail, it’s because someone ran a soft check on your report.
If you can’t qualify for a bank loan and need to get a bad credit loan instead, you should stick with lenders who perform soft credit checks. That way, your score won’t be impacted and there won’t be any risk in applying. Additionally, you should do your best to avoid no credit check loans at all costs. Not performing any sort of credit check is a flashing neon warning sign that the lender doesn’t care about your ability to repay. In fact, they might stand to make more money by giving you a loan that you can’t afford and trapping you in a long-term cycle of debt.
3. Carrying any high balance on your credit card.
Paying your credit card bill each month is great, but it’s not enough to maintain good credit. Ideally, you want to pay your credit cards off in full every month—that way, you get all the benefits of using one, like points or miles, without accruing any interest. But lots of us carry balances on our cards from month to month, paying them down a little at a time.
Here’s the thing: A lower balance is much, much better for your score than a high balance. At 30 percent of your overall credit score, your “amounts owed” is the second most important factor in your score. But we’re not going to just sit here and tell you to “owe less debt,” cuz that’s kind of obvious and isn’t super helpful. If you’re carrying high balances, you should aim to get them down to 20-25 percent of your total. Doing so should lead to a nice little uptick in your score.
And you should also be warned that most issuers report balances before your payment is received. So even paying off your balance in full every month could leave you vulnerable to high balances. To be safe, you should always avoid spending more than 30 percent of your balance, even if you plan to pay to it off by month’s end. Otherwise, you’ll risk negatively impacting your credit score for no good reason.
4. Failing to have a diverse credit mix.
Okay, so spending too much money on your credit card—even if you’re paying it off every month—can be bad for your credit. Clearly, the solution is to just not have a credit card, right?
Wrong! That’s also bad for your credit. Yet another factor in your score is your “credit mix,” which tallies all the different kinds of credit that you’ve taken out. It looks at credit cards versus student loans versus mortgages and auto loans versus personal loans, etc. So if you think that you can take care of your credit score by, for instance, paying back your student loans without ever having a credit card, you’re wrong.
If you have bad credit and can’t qualify for a standard credit card, you should consider getting a secured credit card. Secured cards require you to put down some money as collateral that also serves to set your credit limit. So a $500 deposit would give you a $500 limit on your card. The great thing about these cards is that the lenders who issue them will report your payment information to the credit bureaus, which makes them a great method for rebuilding your credit.
5. By having the same name as someone else with bad credit.
Yeah. It turns out that your credit score can be negatively affected without you doing a darn thing wrong! You can do everything right—pay your bills on time, keep your credit card balances low, only apply for new credit when it’s totally appropriate—and your score can still get dinged if the credit bureaus mix up your info with someone else’s.
Now, it’s totally understandable that the credit bureaus would make mistakes. After all, they are keeping detailed records for hundreds of millions of adults across the US. Errors are an inevitability. But that doesn’t make it any less frustrating when your information gets confused with someone else’s, especially if they’re making poor decisions with their credit.
Oftentimes, these errors will arise from you and that other person having a same or similar name, resulting in what’s called a “mixed” file. Other times, this incorrect information on your report could be the result of something much more serious. It could be an indication that someone has stolen your identity.
In order to keep on top of your credit report, you should be regularly checking it for inaccuracies. Here’s the good news: You can request three free copies of your credit report per year, one from each credit bureau. To order your free copy today, just visit AnnualCreditReport.com.
If you find an error and need to have it corrected, just follow the instructions laid out in our blog post, How Do You Contest Errors On Your Credit Report? When it comes to preserving your good credit—or improving your bad credit—you have enough to worry about without someone else’s mistakes ending up on your score.
To learn more about ways you can fix a bad credit score, check out these related posts and articles from OppLoans:
- An Apple a Day Keeps the Bad Credit Away*
- Why You Should NOT Close That Old Credit Card
- How to Fix Your Bad Credit in 2018