6 Surprising Things That Hurt Your Credit Score
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Your credit score might only be three digits, but it can have a substantial impact on your financial life because lenders use it to decide whether you get a loan and how much interest you pay. Nobody wants to lower their credit score, but if you don't know what to avoid, you could unintentionally shoot your financial self in the foot and lower your credit score. “If you’re close to a hard cutoff range for a loan or credit options, then it can mean thousands of dollars in interest,” warns Anika Hedstrom, MBA and senior financial analyst in Medford, Oregon. “If, however, you have an 800 credit score and it moves to 797, then nothing is going to happen. Until you are a solid 760 plus, I would encourage every point increase.”
Applying for Multiple Credit Cards
When you apply for credit cards, including store credit cards, each application results in a hard inquiry on your credit report. “Hard inquiries negatively affect your credit score slightly,” says Andrew Novick, a certified financial planner with The Investment Connection in Center Valley, Pennsylvania. “By shopping for loans or applying for credit cards at several institutions, you may inadvertently cause your credit score to dip. However, the dip should be minor in most cases.”
Extended Loan Shopping
Each time you apply for a loan, banks pull your credit score. If you do your rate shopping in a short period of time, those inquiries all count as just one. However, the longer you take, the more inquiries could count against your score. “After the financial crisis and resulting Dodd Frank Act, obtaining credit has become more cumbersome,” says Hedstrom. “Consumers may not realize that if they wait 30 plus days to shop around for say a home loan, then it could result in independent hard inquires. Home mortgages, auto loans and student loan rate shopping within a constricted time period only results in one hard inquiry.”
Late Payments on Debts
You might not think too much of paying late on your credit cards periodically as long as you catch up eventually, but the effect can be larger than you’d imagine. “Credit scores give the largest weighting to on-time payments,” says Hedstrom. “Missing one payment could last seven years on a credit report. However, if you have a solid history and miss one in a blue moon, then call your credit company and explain the situation, kindly asking for a fee reversal. For the most part, as long as you are in communication with them, and you don’t make a habit out of it, you should be OK.” To avoid missing payments by accident, Hedstrom advises setting up automated payments.
Closing Credit Cards
Your credit score might not even cross your mind when closing an old, unused credit card. But surprisingly, this can have a negative impact on your credit score. “Popular opinion is generally to avoid closing credit cards to keep the ratio of available credit to the outstanding credit balance high,” says Novick. “Lowering the ratio will lower your credit score. Canceling an older card will also lower the average age of your credit, which will lower your credit score.” However, a small ding on your credit report might be worth it in the short term. “I advise having a main credit card and a backup,” says Novick. “Even if you never use the backup, it should be kept open for emergencies. However, I generally advise closing other unused credit cards, especially cards that charge annual fees. I like to keep things simple – maintain as few accounts and as few credit cards as necessary. Having extra unused credit cards can increase the risk of identity theft and fraud. Closing extra cards won’t have a significant impact on one’s credit score, especially someone who already has a high score.”
Debts Allocated to an Ex in Divorce
Even though your divorce decree might say your ex is responsible for paying certain joint debts, your credit score could be hurt if your ex doesn’t pay. “A divorce decree will not relieve you from joint debts incurred while married,” says Hedstrom. “All joint accounts are the responsibility of both spouses, regardless if your ex is ordered to pay a particular debt. If it is not paid, the grantor can pursue legal action. Make sure to close all joint accounts and work with creditors to be released from the debt. Then continually monitor all accounts until everything is final.”
Unpaid fines, such as parking tickets, traffic tickets and even library fines could end up hurting your credit score. As cities turn over the debts to collection agencies, those collection agencies can report these debts to the credit bureaus, which hurts your credit score.