- Francesca Sacco
8 Financial Mistakes That Will Ruin Your Credit Score
Your credit score is a precious asset to your financial outlook. A great credit score will open doors to low interest rates and pain-free credit approvals that strengthen your financial stability and your purchasing power.
A bad credit score is a roadblock to all of those conveniences and can end up costing you money or even limiting your options when seeking out new credit. Because this credit score is based on your own financial behaviors, the decisions you make have a direct impact on your credit score.
In some cases, what may seem like harmless mistakes can actually bring significant consequences that hamper your credit for years to come. To help you avoid these complications, learn more about eight mistakes that can cause a sharp drop in your credit score.
1. Missing the Due Date for Your Bills
Do you struggle to pay your bills on time? If so, it could be hitting you hard in your credit score.
On-time bill payments are one of the most heavily weighted factors when calculating your credit score at any of the three major bureaus. When you miss a payment, your creditor could report it to those bureaus, and the missed payment can be factored into your credit score calculation for the next two years.
2. Overcharging Your Credit Card
Overcharging doesn’t directly lead to a lower credit score, but a high debt utilization ratio is a red flag for creditors and will likely lead to a drop—especially if that debt utilization is greater than 30% of your available credit.
High charges can also make it difficult or impossible to pay off your credit card bills in full every month. The good news is that, if your debt utilization is high, paying off your credit cards can lead to a dramatic increase in your score.
3. Closing Too Many Accounts at Once
While you might be tempted to get rid of old checking and other accounts you never use any more, doing so can hurt your credit score by reducing the age of your average account.
A longer credit history with an older average account age will get scored higher by credit bureaus — so hang onto those older accounts if you can.
4. Never Using Credit Cards or Other Forms of Credit
Irresponsible use of credit is a bad strategy for managing your credit score. But if your goal is to preserve your credit score by avoiding credit altogether, think again. The lack of any credit history can actually be to your disadvantage because there’s no evidence of creditworthiness to account for in a credit score calculation.
You’re better off using credit in moderation, such as opening a credit card account and using it sparingly to keep it active and build up a positive track record.
5. Cosigning on a Loan for Someone Else
Cosigning on a loan can help a friend or family member afford a new apartment, vehicle or even a home. But since you’ve signed an obligation to this debt, the debt counts against your credit score and can lower your score significantly.
6. Applying for New Credit Too Frequently
Too many applications within a two-year period can serve as a red flag that your finances may not be in great shape. If you’re constantly trying to acquire access to new credit, credit bureaus will interpret this as a potential sign of risk to creditors.
7. Allowing an Overdue Account to Go into Collections
Failing to pay a bill doesn't make it go away. It only leads to that nonpayment appearing on your credit report and damage to your credit score.
Sometimes, this damage can be significant. And you won’t move past this nonpayment quickly. Valid collections accounts will be counted in your credit score for seven years.
Given these consequences, you’re better off paying the bill and keeping your credit report clean.
8. Not Checking Your Credit Report Regularly for Errors
Sometimes the reason your credit score drops isn’t your fault at all. It could be caused by a reporting error or other discrepancy that appears on your report.
Given the risk of this information appearing on your report, consumers are encouraged to request free copies of their credit reports at least once a year and to review all of the information to make sure it’s up to date. If you find any inaccuracies, you can submit a dispute to have them removed.
Preventing Simple Mistakes from Cutting Down Your Credit Options
When you don’t know the criteria used to determine your credit score, simple mistakes or oversights can have large consequences for your creditworthiness — not just today, but for months and even years to come.
With a strong understanding of these rules, though, you can continue to build a stronger credit history even in periods of your life where your income and financial outlook isn’t as strong as you would like them to be.
Ready to take an important step toward building credit and managing credit responsibly? Open a checking account today.