We often touch on improving credit scores in this space. While that information is important, it is even more important to not damage your credit if you possibly can. An ounce of prevention goes a long way in the world of credit.
Here is a list of seven of my favorite deadly credit sins that are sure to hurt your credit score, even when you think you are doing the right thing.
1. Paying less than the minimum
Payment history is worth 35 percent of your FICO score. This calculation heavily weights you at least making your minimum payment. So, if you have a choice, don’t make a payment that is less than the minimum. Some people believe that as long as you make a payment, any payment, there’s nothing a creditor can do to you. That is definitely not the case!
But what if you simply cannot make the minimum payment? If you don’t, you’ll be hit with a trifecta of fees, interest charges and credit damage. Plus, your next month’s minimum will go up. Additionally, you may be contacted by your creditor to find out why you didn’t make your full payment and if you can cure any deficiency right away.
It is helpful to know that nearly all creditors offer hardship programs to help their customers through a rough patch. These are generally short-term, but if your situation is likely to resolve itself in a few months it may be just what you need to get you through. Don’t go too long without reaching out (the sooner the better). And you’ll also need to pay the reduced amount in full each month, both to stay on the program and to help your credit score.
2. Paying just the minimum
This seemingly harmless behavior can hurt your score because of what is known as the credit utilization ratio. Credit utilization—how much of your credit you have used—accounts for 30 percent of your FICO score. If you make your minimum payments on time, as we discussed above, you will have satisfied the payment history portion of your score.
Some consumers mistakenly think that just by paying the minimum and carrying a balance they are improving their credit scores. But if you only make minimum payments, you may risk seeing your utilization score suffer. This is especially true if your balance is high to start with, because often minimum payments do little more than cover your interest payment for the month without touching your principal balance.
Your utilization should be at 30 percent or less (I personally recommend 25 percent) to reap the most benefits from this portion of your credit score. Maxing out a credit card can result in a penance of over 100 points being lost if you have a high credit score, according to FICO.
3. Withholding payment during a dispute
If you have a disagreement with your credit card company regarding a purchase, you do have the right to withhold payment. Card users often think that once disputed, the charge effectively disappears and they still have the disputed amount available for spending.
However, you need to know that the amount in question may still count against your credit limit until the dispute is resolved. So once again, you are looking at potential damage to your utilization score factor if you choose this option. And if you are not successful, you will owe the full amount and likely have interest charges tacked on to boot.
4. Closing a card with a high credit limit
Here again you risk damaging your utilization score. When you close an account, especially one with a high credit limit, you have reduced your available credit, thus lowering your utilization score.
People mistakenly believe that because positive credit card accounts are reported for 10 years, that the card’s credit limit still factors into their credit utilization scoring factor. It does not. However, the closed card will continue to count in calculating your length of credit history.
While worth only 10 percent of your FICO score, this aspect is the only one over which you have little control, unless you are added as an authorized user on an older account or, as in this case, choose to close an account. Positive history stays on your credit report (and affects your credit score) for 10 years, but if the account is closed it will then disappear from your record and cease to do you any good. This is why it is a good idea to keep your accounts open if you can.
5. Adding an authorized user or becoming a co-signer
This is tricky, especially for someone emotionally connected with someone who has bad or no credit. Parents naturally fall in this category, but other family members, friends and lovers can also find themselves in this situation.
Yes, there are benefits to be had for someone who is looking to build credit, but there is also a risk that you are taking on. A risk, it should be noted, that a professional lender (who only makes money by saying yes) has turned them down for, with good reasons. Any time you choose to add someone as an authorized user or co-sign on a loan, you need to set clear limits both on how much they can spend and how they plan on paying their portion of the bill.
Good intentions and fleeting gratitude do not make payments. Remember that ultimately the card issuer or lender does not care who made the purchase—you are the one with whom they have an agreement with and you are the one who is responsible for making the payments.
6. Using a balance transfer card for purchases
Moving balances from one card to another to take advantage of a lower interest rate can be a smart financial move. But you need to get the balance paid off before you start using your balance transfer card for other purchases because the window to use the promotion is usually limited.
Many cards offer great rewards for purchases during a promotional period and while it is certainly tempting to use it for daily expenses, you will be better served to ignore that aspect until you have paid off the original balance. And, as noted above, don’t close the card you paid off unless you have a really compelling reason to do so.
7. Applying for too many cards at once
If you have worked hard to get your credit score to a place where you feel like you can qualify for better cards, be careful to only do this sparingly, one card at a time. You might think that once your score reaches a high number it is time to apply for all those hard-to-get cards requiring top scores before your score dips. But hard inquiries will cause a further drop in your score as each lender pulls your file (each hard inquiry can cause your score to drop by about five points or so). So, the last lender making an inquiry may see a very different score from the first one.
While new credit only accounts for 10 percent of your FICO score, newer consumers may find that more weight is given to this category. Give your score time to recover from the hard hit you took from the inquiry before you apply for credit again. The time period is not set in stone, but you should probably at least give yourself six months. And don’t apply for credit just because you can; credit should be accessed on an as-needed basis.
As I said earlier, this is by far not a complete list of ways you can hurt your score, just some of my favorites. Collections, foreclosures and bankruptcies are of course great ways to trash your score and are to be avoided at all costs. The best way to avoid hurting your score is knowing how your score is calculated and doing the right things to protect those aspects. Pay your bills on time, watch your credit card usage and only apply for credit when you need to. Doing these things will keep you on the right track to the credit score you want.
Have a credit score question for Steve? Drop him a line at the Ask Bankrate Experts page.