5 Most Common Mistakes That Lower Credit Scores


Your credit score serves as a quick way for lenders to get an idea of how well you've managed your credit in the past, especially when banks are deciding whether to lend you money in the future. If you're looking at taking out a loan, avoiding small mistakes that can ding your score can help you secure loan approval -- and a lower interest rate.

Signing Up for Retail Cards

Signing up for a store credit card to get a discount on purchases can ding your credit score because it results in a hard inquiry on your credit report. P. J. Wallin, founder of Atlas Financial, refers to this as "the infamous cash register offer for 10 percent off" that stores use to get you to sign up for their card. "This likely causes a hard inquiry and a negative impact on credit." Even if you close the card, which can cause additional dings on your credit score, the inquiry remains.

Managing Credit Cards

The potential dings to your credit score from credit cards extend far beyond missing your monthly payments. According to Wallin, people can hurt their credit by closing their oldest active credit card or cards they've just opened. In addition, Wallin warns that having too much debt on each card can lower your score -- even if you still pay on time. For the credit cards you do have, he recommends keeping your balance to one-third or less of your credit limit. For example, if your credit limit is $3,000, you don't want your credit card balance to exceed $1,000.

Co-signing Loans

Some people ask for friends or relatives to co-sign their loans, as if they were just asking for a quick, harmless favor. However, "If the co-signee fails to pay, you're on the hook," says Wallin. "Therefore you may not know that payments have stopped until it's too late, as the bills were likely sent to the primary party from the start." All of those late payments show up on your credit report, and you're left paying the bill for the original borrower.

Debt Disposed of in Divorce

You might think that you're in the clear when the divorce court says your ex is responsible for, say, paying off your joint credit card and car loans. However, if your ex doesn't pay, that still shows up on your credit report, according to Wallin. He notes that a qualified divorce lawyer can advise you on ways minimize the potential for damage to your credit score. If you see debts aren't being paid, you can take action to minimize the impact on your credit report.

Financing Purchases With Store Payment Plans

Signing up for a store's financing plan can lower your score while you're paying a purchase. Stores may open a credit line in the amount of the purchase, so your credit report looks like you're using all of your available balance, and of course, this also results in an inquiry in your credit report. However, the news isn't all bad. According to Wallin, despite the initial ding to your credit report, you could improve your score by the time you've paid off your purchase. "If you make your payments, it may actually increase your credit after the full payoff."

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