Even when you practice good fiscal fitness, your credit score can suffer a knock-out. Sometimes the steps you think make financial sense can actually harm you, even if you pay your bills on time, keep your debt to reasonable levels, and make purchases that are responsible, not frivolous.
That’s all good stuff and goes a long way toward establishing a solid financial footing. But there are things you may be doing — often with the best of intentions — that you could hurt your credit score.
Check out these five ways your actions could hurt your credit score.
1. Closing Out Credit Cards
What sounds more sensible than canceling a card and cutting up the plastic? One less credit card means one less chance to overspend and one more chance for creditors to smile on you.
Except that's not always the case.
One of the factors used to calculate your credit score is the length of your credit history. A credit card that has been open for ten years looks better on your credit report than one open for ten weeks.
Your length of credit history makes up 15 percent of your credit score and factors in the age your oldest account, the age of your newest account, and the average age of all your accounts. An account that is eligible for a senior discount is an account you don't want to put into early retirement.
That doesn’t mean you should keep that decade-old card open with a bulging balance. Pay down — or even off — the balance. Just keep that card open to keep your credit history accurately aged.
2. Moving your debt to a single card
Have three or four cards with confusingly similar names and nagging but not nasty balances? It’s tempting to pool these balances onto one card for the sake of convenience.
One bill, one payment, one less source of stress. Makes sense, right?
But remember: Your credit score is based in part on the balance you carry compared to the credit limit. Creditors like to see no more than 30 percent of the available credit limit used.
Put all balances on one card and the ratio jumps, sometimes dangerously. In many cases, you might be better off tackling one balance at a time, especially if you're able to pay more than minimums and the interest rates are reasonable.
Slow and steady can sometimes win the credit score race.
3. Getting a store card
It can seem like a good idea to spend just 10 minutes (or even seconds!) to get a card that can make a serious dent in that day’s purchase at your favorite retailer.
Keep in mind, though, that store credit cards usually come with high interest rates. A recent survey shows that the average APR* for a new card is a whopping 27.52%. When you carry a balance with an exorbitant rate like that, you easily offset any savings you may have realized with your purchases.
So think twice — maybe even three times — before signing for a store credit card, especially under pressure from a sales associate.
4. Being too good of a friend
It’s tough to say no when a friend or family members ask you to co-sign a loan because they won’t qualify on their own.
But it might be in your credit score's best interest to do so.
Once you have co-signed a loan, it goes on your credit report, adding a debt for something that you didn’t seek out.
And you’re responsible for this loan as much as the person you are helping. If they fail to make payments on time, or at all, you're stuck making them. And if you fail to make those payments that your friend or family member has reneged on, your credit score is going to take a dive.
Even if they faithfully pay off the loan, it’s still a debt on your record, which can impact your debt-to-income ratio and lower your credit score. This is something you don't want to happen if you're going to be applying for mortgage or HELOC any time soon.
Friendly advice: Give your friend or family member some money if you must, but be wary of giving them a ride on your credit.
5. Doing anything that requires a credit check
Need a new or refinanced mortgage? A car loan? Another credit card?
All of these actions will require a credit check.
Of course, you can’t — and shouldn’t — avoid all of these transactions. But you should be informed by the lender that your credit will be pulled. If in doubt, ask.
And make sure you really need the debt you are taking on. Mortgages can offer home ownership, a valuable asset. But requesting credit cards, especially several at the same time, is more questionable and might be worth spreading out, if you need them at all.
Mastering your credit takes some skill. It never hurts to stop and think before making moves, even when they seem at first glance to make sense.
But you can do this. Give yourself some credit.
*APR=Annual Percentage Rate
Looking for more tips that'll help you raise your credit score? Call or stop by for a free credit report review and score enhancement from Hanscom FCU.