By Jason Bushey
Few sectors of personal finance are as misunderstood as credit. We’ve all been passed on some semblance of how credit score works by our parents, but often those before us are as confused about their scores as we are.
How do you build credit? What affects our scores? How much debt is too much debt is too much debt? And – perhaps most importantly – how can I improve my own scores? (Yes, there are more than one!)
These are all excellent questions, and not all of them have such concrete answers. The fact of the matter is, there’s a lot that goes into your credit – and an equal number of ways to screw your score up completely. Below are 25 things you as an American consumer are doing that are absolutely killing your credit…
Refusing to acknowledge credit
Don’t be misunderstood; “no credit” in no way insinuates that you have “good credit”. Just because you’ve avoided credit cards up to this point doesn’t mean you look like a promising investment in the eyes of creditors. In fact, you’re a mystery, and are thus unlikely to get approved for a loan when you really need it.
Carrying a ton of credit card debt
Some debt is OK, even perhaps beneficial to your score depending on the credit scoring model. FICO, the most widely-used credit scoring model, even infers that carrying a very small balance might actually be better for your credit than carrying no balance at all. But a lot of debt? Spread across one or multiple cards? That rings an alarm sound for lenders to stay away from you.
Because a third of your FICO score (we’ll stick with this model the rest of the way to remain consistent) is determined by how much you owe relative to your total score, it’s important to keep your debt under 30 percent of your total available credit. That said, many experts recommend that the best “credit-utilization-ratio” is 10 percent and under.
Never using your credit card
The flip side of using your credit card too much (and refusing to pay it off) is never using it. Credit card companies reserve the right to close your card due to inactivity. If they close your account, you lose the credit line that goes with, and it stops aging – two things that might not necessarily hurt your score right off, but certainly won’t help it, either.
Use your cards sparingly to keep them open. Credit cards accounts are a lot like George Clooney – the older they are, the better they look.
Owning just one card
Your first credit card gets the ball rolling on building credit, but it can only take you so far. FICO takes into account the number of accounts you have, the kind of accounts you carry in your name and – again – your overall credit line relative to how much debt you carry. Opening up a new account extends your credit line and adds another good-standing account to your profile. That said…
Applying for several cards over a short amount of time
…is a bad idea. Every time you apply for a card, your score takes a small hit. This is to deter consumers from applying for lots of different credit cards or unnecessary loans. (Whether it works or not is hard to say.) This is called a hard inquiry, and they stick like glue to your credit report for two years, though in reality they really only have a negative effect on them for one. Too many of these on your profile make you look desperate and a tad irresponsible, neither of which are going to help build your credit.
Give it six-to-12 months between applying for credit cards to avoid that stench of desperation.
Closing old accounts
Unless you have a serious spending issue, it’s a smart idea to keep your credit card accounts open for as long as you can. Like we mentioned above, aged accounts have a positive impact on your score, and more importantly the credit line that provide allow consumers to carry a small balance without hurting their score.
There’s usually no good reason to close that old account, so keep it open and let it build your score one day (and purchase) at a time.
Making late payments
Late payments are costly to your credit score and your wallet. Though there are exceptions, the average late fee costs a cardholder $35. Plus if that late payment is reported to the credit reporting bureaus, the impact could be even great since it becomes a blemish on your otherwise sterling payments history. What’s the only thing worse than making a payment late?
Skipping payments entirely
You guessed it – skipping a payment can wreak all sorts of havoc on your credit. Your account may be sent to collections (usually after 60 days), your credit card company might begin to call you incessantly, and overall you’re probably going to start feeling really crummy about your personal finance situation.
Don’t let this happen! Never skip a payment and make maintaining an excellent score a priority; few monthly payments can effect as much as your overall credit score as the one required by your credit card. Keep it blemish-free.
Racking up interest
While high interest fees won’t directly hurt your score, they will make it harder to pay off your cards. This could in turn lead to snow-balling debt that increases your minimums and makes the likelihood that you’re late on a payment (or default altogether) more likely. You won’t be doing your bank account any favors, either.
If you’re racking up interest, consider transferring your balance to a new card that charges zero percent in interest during its introductory period. You’ll save money and pay back down your debt quicker at zero percent. It’s called “math” people!
Leaving yourself open to ID theft
Identity theft can be a credit killer, especially when you realize what’s happening after it’s too late. Carrying around unnecessary personal information like your social security number, using your credit card on public computers, using Password123 for ALL of your online passwords; these are all bad ideas that could leave you vulnerable to ID theft.
Take care with your cards, switch up your passwords and remove any unnecessary personal info from your wallet. It could be a credit score savior in the long run…
Using prepaid cards to build your credit
Don’t be fooled – prepaid cards do NOT improve your score in any way, shape or form. They might work as an alternative to a personal checking account, but because they’re not offering a line of credit, there’s no actual “credit” available on prepaid cards. Thus, they’re useless when it comes to building your score.
It’s not necessarily a credit killer, but it could very well be a waste of time.
Applying for the wrong cards
As you might have guessed, not all credit cards are available to all consumers. If your credit score is limited, bad or perhaps non-existent, you’re highly unlikely to get approved for those zero percent cash back cards you see advertised daily on TV.
Like we mentioned above, every hard inquiry of your credit has a small but negative effect on your score, and you want to keep these kinds of credit pulls at a minimum. Don’t waste a hard pull on a credit card you’re unlikely to get approved of. Similarly…
Taking snail mail credit card offers seriously
The word “pre-approved” is used pretty loosely these days, especially when it comes to credit card offers that find your mailbox. Just because you’ve been “pre-approved” for a credit card offer doesn’t mean your guaranteed approval. Not only that, there may be several other card offers available that work a lot better for you and your budget.
Think about it – if you hated flying, you wouldn’t sign up for a frequent flyer credit card, right? Don’t let the flattering pre-approved language rope you into a card you don’t want and will probably never use. The result could be a stale, inactive account on your credit profile.
Co-signing on a card with your irresponsible friend or family member
You may be a generous soul, but never get suckered into co-signing on an account with a friend or family member. Any missteps they have with this account will appear on your credit report. Don’t put your credit future in the hands of someone else. Politely decline any co-signing “opportunities” afforded by a friend or family member.
Taking out a cash advance
They aren’t quite as bad as Payday Loans, but with interest rates that hover around 30 percent and no grace period, your credit card is one of the last places you want to look for quick cash. In the end, the cash goes quick but the interest will surely linger, thus increasing your overall debt and the minimum payments due at the end of each month. That’s an unfortunate 1-2 punch to your wallet and quite possible your score.
Carrying a balance on multiple cards
When you carry a balance on more than one of your credit cards, you could be confusing the credit scoring models that be. The result – and I can speak to this personally – could mean a swift but significant drop in your score. I recently saw my Experian score drop 40 points, and the only thing that changed in the eyes of creditors was that I was once again carrying a balance – of $7, mind you – on my old card.
If you don’t believe me, maybe you should hear it from FICO: “A larger number of accounts with amounts owed can indicate higher risk of over-extension.”
Assuming your student loans are enough to build substantial credit
It’s true that student loans can build credit. It’s not true that this is “enough” to build a substantial amount of credit, aka the kind of credit that can get you an auto loan, a mortgage, etc.
Student loans are considered installment loans. With installment loans, the amount owed each month is consistent. Creditors take these types of loans into account, but not as much as loans that are considered “revolving”; these are the loans in which the amount owed each month can vary. You know, like a credit card.
Plus, credit cards represent a line of credit available to you that you don’t necessarily owe. Installment loans on the other hand only represent how much you owe. It’s confusing, but in the end opening a credit card account will give you more of an opportunity to build significant credit.
Give your kids your credit cards
When you give your kids your credit card, you’re putting your credit score in the hands of someone who knows a lot less about credit than even you do. Adding your kid as an authorized user to your account is a good idea to help them build credit. But actually handing over said card is more than likely a bad investment.
If you’re really worried about their financial well-being in case of an emergency, set them up with a prepaid card instead. That way, there’s no danger of them falling into debt, and better yet no danger to you and your credit score.
Ignoring your credit report
By law Americans have the right to one free credit report each year. (You can actually apply to receive yours for free at AnnualCreditReport.com.) Your credit report provides the blueprint for how your score is calculated, and can clue you into little issues you either weren’t aware of or had no idea were affecting your score.
You might find an old overdue library book on your report, or perhaps an inaccurate address. Heck, you might find something on there that’s not yours AT ALL. According to a report out earlier this year by the FTC, five percent of credit reports contained serious errors that could alter a score by as much as 25 percent. One in four credit reports contained minor errors.
Basically, inaccurate information on a credit report is anything but rare. Review yours and research the necessary steps for getting these inaccurate claims removed from your report at once.
Allowing utility bills to pile up
Most utility companies won’t report your regular payments to the credit reporting agencies. But if you fail to make a payment, or decide to let these bills pile up and go late, they could report these bad habits to the major credit bureaus which will in turn make you look like more of a risk in the eyes of lenders.
Paying your utilities are unlikely to improve your credit, but they could certainly hurt it.
Sticking with your secured card for too long
Secured cards are actually a great way to build credit. That said, they have their limitations. Namely, their credit line increases are rare and can require a further deposit from the cardholder. Secured cards are also labeled as such on most credit reports. This is fine and doesn’t have a negative impact on your score, but again it does impose limits to just how much you can do with a secured card.
If you’ve spent a year or more with your secured card and have had no issues, you’re probably ready for an unsecured card. A new, unsecured card will increase your total available credit and add another new account to bolster your overall profile.
Lowering your own limits
Paranoid you’re going to spend too much on your credit card? You may ask your credit card issuer to lower your own limit. But as you’ve read a handful of times by now, your total available credit is only there to help you; lowering it is sort of like shooting yourself in the foot, especially if you’re already carrying a hefty balance.
Sock drawer that credit card if you’re really afraid of over-spending, but don’t willfully ask your credit card company to lower your own line of credit.
Changing your bank frequently
I bet you didn’t know that some (thought not all) banks check your credit score before approving you as a customer. Well, they do, and moving your accounts around frequently means that you’re generating more and more hard inquiries. Keep your money in one place and keep those hard inquiries at bay.
Applying for no-limit credit cards
Credit cards with no limit – such as business charge cards – sound like they should improve your credit exponentially with responsible use. But because they have no limit, the issuer isn’t reporting a line of credit to the issuers. Consequently, these cards aren’t improving your credit line or the all important credit utilization ratio we spoke of earlier.
There’s a limit to how much no-limit cards can really help your score, and the risk perhaps outweighs the reward.
Maxing out your cards
We talked about carrying a high balance earlier, but how about maxing out one (or all) of your credit cards?
Yup – that’s a bad idea, too.
This isn’t an arcade; hitting the high limit is not a good thing when it comes to credit cards. It’s not as if your credit card issuer will extend your credit line once you’ve hit your limit. Nor will another credit card company be willing to take on such a high amount of debt via a balance transfer.
Basically, maxing out your cards is a sure sign to credit card companies that something about your finances isn’t right. Thus you start to look like a serious credit risk and, ultimately, your credit score can and will suffer significantly.