Your credit score is like a financial fingerprint. It is a numerical expression based on a level analysis of a person’s credit files, representing their creditworthiness. Banks, lenders, and even landlords look at this score to determine how financially responsible you are. Many of us are aware that failing to pay bills on time or defaulting on a loan will have negative effects on our credit score. However, some seemingly innocuous financial decisions can also seriously infringe on your credit score, some of which may come as a surprise.
Let’s dive into these and explore ways to prevent taking an unexpected hit on your credit profile.
1. Closing Old Or Unused Credit Card Accounts
You might think that closing an old or unused credit card would be good for your credit health. On this page, we’ll burst that bubble: doing so can actually harm your credit score. Closing an old credit account affects your credit utilization ratio and your length of credit history, two critical factors in credit scoring.
How to Prevent This:
If the card doesn’t have an annual fee, keep it open and use it for small purchases occasionally to keep the account active. If you really want to close an account, make sure it’s a newer one with less impact on your credit history.
2. Co-Signing A Loan
When you co-sign a loan, you take on the full responsibility of repaying it if the primary borrower fails to pay. This action could impact your credit score negatively if payments are missed or delayed by the other party.
How to Prevent This:
Think carefully before co-signing any loan. Make sure that the primary borrower has a strong financial track record. Alternatively, consider other ways to help them without co-signing, like offering a family loan.
3. Frequently Opening New Credit Accounts
Each time you apply for a new credit account, a “hard inquiry” is made into your credit report. Several hard inquiries within a short period can lead lenders to perceive you as a higher-risk customer, subsequently lowering your score.
How to Prevent This:
Only apply for credit when you really need it. When shopping for rates, do it within a short time frame to minimize the impact of hard inquiries.
4. Holding High Credit Card Balances
High credit card balances increase your credit utilization ratio, which makes up approximately 30% of your credit score. Higher utilization is seen as a risk indicator.
How to Prevent This:
Aim to maintain your credit card balances below 30% of your credit limit. Even better, pay off the balances in full every month to show you can manage credit responsibly.
5. Ignoring Errors On Your Credit Report
Errors on your credit report can also tank your credit score. These could range from wrongly reported late payments to accounts that are not yours.
How to Prevent This:
Regularly check your credit report for errors. If you find any, dispute them immediately with the credit reporting agency.
6. Not Having Any Credit
It might seem paradoxical, but having no credit is almost as bad as having poor credit when it comes to calculating your credit score.
How to Prevent This:
Start building your credit history as soon as possible. A secured credit card or a credit-builder loan can help you establish a good credit record.
Conclusion
Guarding your credit score is an ongoing process that demands financial discipline and awareness. Many factors that can bring it down are not always obvious. From closing old accounts to co-signing loans and ignoring errors on your credit report, several actions could infringe upon your credit score. By being vigilant and proactive, you can make informed decisions that will help you maintain or even improve your credit score, setting you up for long-term financial stability and success.