Tristan Powys (Credit Counsellor) @ Lucid Living
You already know that late payments or a judgment can damage your credit score. But did you realize that otherwise insignificant financial decisions can also cause your credit score to plummet? Keep your credit report pristine by avoiding these potentially destructive moves whenever possible.
1. Opening a department store card
It may seem like a great idea when the cashier suggests it: open a store credit card, receive an instant discount on your purchase. But it often pays to decline the card in spite of the discount, because the savings may not be worth what the transaction will do to your credit score. New card applications initiate a hard inquiry on your credit report, which can lead to a drop in points.
2. Closing a credit card account
If you’ve scrimped and struggled to pay off a card, your initial reaction may be to cut up the plastic and close the account. Resist the urge. Various factors are taken into account when calculating your creditworthiness, and 15% of your credit score is determined by the length of your credit history. By closing an account – especially an older one – you shorten your credit history. The more established accounts you have, the higher your credit score.
Credit card companies also look at how much of your available credit you are using, which is referred to as your credit utilization rate. They like to see 35% or less of your credit in use at any one time. Paying off a credit card and leaving it open improves your utilization score, but closing it could do just the opposite.
3. Keeping a zero balance
Paying a credit card off completely seems like it should do wonders for your credit, but it could be better for your credit score to leave a small balance on the card. When a small amount is owed, the remaining credit on your card is factored into your credit utilization ratios, whereas cards with no balance don’t count. So oddly, your credit score can actually drop when you bring a card down to zero.
4. Purchasing a cell phone contract
Many of today’s cellular phone providers check credit history to make sure that you pay your bills. But doing this constitutes another hard inquiry that is likely to ding your credit score by a few points. Shopping around for the best cell phone deals is a good thing – just make sure that every provider isn’t checking your credit report.
5. Buying car insurance
Again, most major car-insurance companies check your credit report when you apply. While a good credit score can earn you lower rates on insurance, make sure the savings you receive from the new policy outweighs the potential hit to your credit score.
6. Negotiating a lower credit limit
Negotiating a lower credit limit on your credit card may seem like a smart move for cutting expenses and boosting your savings account, but by reducing your credit limit, it could affect your credit utilization ratio and lead to a drop in credit score.
7. Keeping a high balance
If they didn’t want you to use a lot of credit, why did they make your card limit so high? In reality, the amount you owe on your accounts determines about 30% of your credit score. Lenders consider those who use a low percentage of their credit – such as 35% or less – to be a low credit risk. Such individuals get a higher credit score as a result. Spending 80 to 90% of your available credit limit negatively affects your credit score for the opposite reason.
Naturally, some of these transactions are easier to avoid than others. But by knowing the threat they pose to your credit score, you can have a better understanding of when these moves really make sense.