Sometimes you can spend so much time trying to improve your credit score that you don’t realise that you might be hurting it instead.
Your credit score is typically made up of a few different parts, including:
Payment history: 35 percent
Total debt (and credit utilisation): 30 percent
Length of history: 15 percent
Types of credit: 10 percent
New credit: 10 percent
While each part can impact your credit score differently, it’s important to pay attention to all of them. Here are some ways you could be hurting your credit score instead of helping it:
Not checking your credit report
Only making minimum payments
Paying bills late
Opening and closing accounts
Avoiding credit entirely
While your credit score is a three-digit number that shows your creditworthiness, it’s your credit report that details your credit responsibility.
Your report is a detailed history of your credit since you began your credit journey. For some, it starts with a first credit card. For others, it could be a car loan.
You can get a free credit report from each of the three major credit bureaus – Equifax, Experian and CallCredit – to see if there are any red flags or errors.
Similarly, not checking your credit score often to evaluate how you’re doing can also hurt you. Chelsea Hudson, personal finance expert at TopCashback, says it’s good to review your score and report to take care of any discrepancies.
“I always recommend checking your credit report every few months to access your purchasing habits and double-checking to make sure your information is correct to guard yourself against identity theft,” Hudson says.
If you’re constantly hitting your credit limit, you become a liability to lenders. Consumer savings expert Andrea Woroch says you should never use more than 30 percent of your total balance across all credit cards, otherwise known as your credit utilisation.
“Those who keep their utilisation percentage low typically have higher scores than those who max out their credit cards constantly,” she says. “Maintaining a low balance will not only help you manage timely payments, but it also helps your credit score.”
If you’re constantly paying with your credit card and carrying a balance every month, you’re not only accruing interest, you’re keeping your credit utilisation high. Once you go beyond 30 percent utilisation, Woroch says your credit score can take a dip.
Regardless of what bills you have, missing payments can crush your credit score.
“Those who constantly pay late show poor money management skills and this signals a risk to potential creditors,” Woroch says. “While many utility providers may not report the occasional late payment, those who regularly pay late face serious implications when it comes to their credit score.”
Payment history makes up 35 percent of your credit score. Late or missed payments may cause a huge drop.
“When you miss a payment, you are viewed as an unreliable borrower,” Hudson says. “Not only will your credit score and history be impacted, but you’ll also be subjected to higher interest rates.”
One of the biggest ways to make your credit score plummet is to open many different accounts at once. But closing accounts could hurt, too.
“Closing old cards with great history is not a good strategy,” says Aris Jerahian from Orange County’s Credit Union. “It indicates you are no longer demonstrating management of that credit line which could have a negative impact on your credit line.”
The length of your credit history accounts for about 15 percent of your overall credit score. The longer your history, the better your creditworthiness is.
Additionally, opening an account can cause a temporary dip in your credit score due to hard search (as opposed to soft search), which are a part of the new credit component of your credit score. Hudson advises against applying for many different accounts, which can completely tank your score.
“You want to limit as many hard searches as possible since they do affect your credit score,” she says. “Although hard searches are only 10 percent of your credit score, it can make the difference between a perfect score and a good score.”
If you’re trying to give your credit score a boost, you might think not using credit at all will show how responsible you are. But it actually has the opposite effect.
“Some people think they are doing (their) credit scores a favour by not borrowing or charging anything,” says Freddie Huynh from Freedom Financial Network. “Credit agencies rely on past payment history to gauge how borrowers will do in the future. If you don’t borrow, they have no information to rely on.”
If you don’t use credit at all, you might be credit invisible. This is where you don’t have enough of a credit history to generate a score. This can create challenges – if you don’t have a credit history, lenders can’t trust your creditworthiness.
There are plenty of ways to use credit responsibly, from credit cards to loans. As long as you’re paying your bills on time, in full every month, you’re on your way to a great credit score.