Late payments are the most obvious culprit, but there are other, less intuitive ways that you may be hurting your score. The good news is, some behaviors are easy to change.
How many times have you committed one of these credit faux pas? On impulse, you open a department store credit card just to save 10 percent. Or you send your monthly card payment two days too late. These are just a few of the common pitfalls that could remove points from your all-important credit score. Find out which of the five common credit mistakes you may be making on a daily basis.
1. Paying Your Bills Late
You forget to pay a bill, or you intend to pay online, but something goes wrong. That happened to Ed Quigley, a retired Springfield, Mo., resident, in October. Quigley, who pays his Visa bill electronically, was blocked from logging onto his bank account to pay his bill due to a security issue on his computer.
Frustrated, he used a friend’s computer but realized two days later that he hadn’t received an e-mail confirmation. The credit card company refused to remove the late fee, so he plans to check his credit report later this fall to see if the late payment lowered his score. (The last time he checked his credit was four years ago.)
The highest-weighted element of the scoring model is paying debts on time — which accounts for 35 percent of your credit score. And a late payment could take 30 to 60 days to be reflected on the score, says Barry Paperno, consumer operations manager at Fair Isaac Corp., which created the FICO score.
If you miss just one payment and catch up the next month, the damage could be minor, says Credit.com’s John Ulzheimer. If you have good credit but miss a payment that turns into a collection or charge-off, your credit score could go down by 200 points in a worst-case scenario, he says. “It’s kind of the no-brainer. Everybody knows it, and it is the one that matters most,” Paperno says. “Don’t even be a day late.”
If you are late a couple of times, it might be a good idea to request a copy of your credit report from the three major crediting bureaus to see what effect, if any, your late payments have had on your credit score.
2. Opening Too Many New Accounts
Putting a new piece of plastic in your wallet impacts your credit score. “Just opening a new account can bring down your score slightly,” Paperno says. An inquiry by someone other than you – like a potential creditor, for example – can knock off a few points.
In a worst-case scenario, says Ulzheimer, someone with good credit could see their score drop 10 to 40 points if they have excessive credit inquiries. But if someone has bad credit, the damage could be five to 30 points.
3. Not Having the “Right” Cards or the “Right” Payment Strategy
There’s nothing wrong with using private label cards (cards used only at a specific retailer) or gas cards, but not having a bank card could hold your score down. “Some things [like bank-issued credit cards] are a little better for your score than others,” Paperno says.
He adds that consumers can improve their score by being smart about how they allocate their debt payments. “Keep in mind that if you have high credit card balances, paying those down will improve your score more than doubling up on your mortgage payment.” Monitoring your credit score on a regular basis will illustrate just how effective paying down your debt can be for score improvement.
4. Closing Out Accounts
Don’t be so quick to close an account, even if you’ve paid the card off or are frustrated with the creditor’s policies or procedures.
Danielle Beauparlant Moser, an Asheville, N.C., career coach, closed her Air Tran Visa account at the end of September because of fraudulent charges. “My recourse was to close the account. I felt like I had no other choice,” says Moser, who had her card for one and a half years. “Why would I anticipate that closing a credit card that’s fully paid off would impact my credit score? I had no idea.”
Those in Moser’s situation, or those seeking to streamline their finances by having fewer cards, end up lowering their total credit line. Your score strongly reflects the relationship of your balances to your credit card limits, which accounts for about 30 percent of your score, Paperno says.
“By closing an account, you´re actually lowering the amount of available credit you have. You’re also decreasing your average length of credit history,” he says.
It depends on each individual consumer, but in some cases, closing an account could lower a score by more than 100 points, Ulzheimer says.
5. Losing Track of Your Credit Limits
Purchasing a big-ticket item using a “buy now, pay later” financing deal could translate into a ding on your credit score. Or, using a credit card for a major purchase and continuing to make daily purchases, even as small as a cup of coffee, could get you closer to your limit, causing your credit score to lower. Those daily decisions add up.
That’s why it’s so important to learn about these credit mistakes and avoid them, says Cunningham. Your first step toward avoiding credit score pitfalls is to read over your credit reports to see which actions are making you lose valuable points. You may think you’re doing something financially savvy when in fact you’re damaging a crucial figure used to help you land a loan — or even a job.
By following these five steps, and checking your credit report and score on a regular basis, you should be in good shape for any future credit endeavors.