Surprising Ways You Can Wreck Your Credit Score
You probably already know that you can damage your credit by not paying bills on time, or letting your accounts go to collections. But there are quite a few unexpected ways to wreck your score, too. Check out these surprising ways to damage your credit—and avoid them if you can.
Maximizing Your Credit Limit
When credit bureaus calculate your score, they use something called the "debt utilization ratio ." This is basically the ratio of used credit to available credit. Keep this ratio as low as possible, Credit Karma suggests. The more of your credit limit you use, the higher your ratio will be. Credit Karma advises keeping your usage under 30 percent.
Increasing Your Credit Card Limit
By the above logic, can you improve your score by then increasing your credit card limit? LearnVest actually says, yes, you can—sometimes. Other times, requesting a credit line increase can actually damage your score. Learnvest explains:
"'. during the recession creditors began assuming that people who wanted increases were about to lose their jobs or were falling into financial trouble,' says John Ulzheimer, president of consumer education for SmartCredit.com. "In recent years, people would call for a credit limit increase and when they hung up the phone, they found themselves with a lowered limit or worse, a closed card." Although the instances of credit card companies lowering limits have decreased recently, you should carefully weigh your situation before picking up the phone."
Money Blue Book expands on this point, adding that credit companies sometimes make "hard pulls" on your report before raising your limit. Before you ask for a credit limit increase, they suggest checking with the company to see whether they'll conduct a hard or soft pull.
Too many hard pulls can knock your score by a few points, Consumerist confirms. However, they do add that the effect usually only lasts for six months.
Still, if you're planning to apply for a mortgage or another line of credit during that time, a hard pull can hurt you.
Some people move all of their credit card debt to one card. Credit Sesame explains why this can hurt your score:
". your score will take a ding any time you carry a high balance on any one card. So if you transfer multiple balances to a single card and get close to (or reach) your credit limit, your score will suffer even if your other cards are paid off."
Similarly, some people choose to take out debt consolidation loans. Credit Sesame says this can still have a negative impact on your credit:
". your credit rating could go down if an underwriter has cause for concern that you could easily rack up new debt on the open and now balance-free credit cards (many people do)."
Bankrate's Steve Bucci confirms this in a Q&A. adding that debt consolidation usually doesn't help credit scores in the long run. Instead of focusing on credit score, Bucci says debtors should focus on overall financial health.
Applying for Too Many Lines of Credit
You probably already know that, when you apply for a line of credit, the lender pulls your report. Again, hard pulls can damage your score. Gail Cunningham of the National Foundation for Credit Counseling explains to Credit Sesame :
"'You don't want a lot of inquiries because that's a red flag to the lender that you're desperate for credit,' says Cunningham. Fortunately, inquiries within the same 14-day period show us a single inquiry, so try to compare options
within that window if you can."
Opting for Financing
Maybe you're tempted by a 0% interest financing plan offered by a furniture or electronics store. While that might seem like a great deal, it might not be so great for your credit.
When you finance a purchase, the lender opens up a line of credit for that exact amount. As you make payments, you begin to maximize your line of credit, CBS News reports. This increases your debt utilization ratio.
In particular, Nerd Wallet explains that creditors often view furniture financing loans as "loans of last resort." These loans look bad on credit reports because they typically cater to high-risk borrowers.
Paying Your Rent Late
According to The Nest. landlords can pay a fee to report your payment history to the credit bureaus.
"Records stay on file for up to seven years and prospective landlords can obtain these reports. Therefore, a missed rent payment may not hurt your actual credit score, but the credit agencies may alert other landlords to the incident."
While most landlords don't report, there are some that do—especially if you deal with a property management company. If your landlord or management company uses a service like RentBureau or ClearNow, your rental history will show up on your credit report, SF Gate reports. On the bright side, if you pay your rent on time, this will actually help your credit score.
If you have outstanding rent due and your landlord decides to involve a collections agency, this could also mean bad news for your credit report. Chances are, the agency will report your account to one or more of the three credit bureaus, says SF Gate.
Ignoring Library Fines and Parking Tickets
At the Smart Credit blog, John Ulzheimer points out that unpaid parking tickets and library fines can go to collections, negatively impacting your credit:
"If you get a parking or traffic ticket or library fine, don't ignore it; you need to pay it. These fees seem minor and not related to credit but you never know what to expect. The next notice could inform you that the bill is being sent to a collection agency."
Once any kind of debt goes to collections, the collections agency has the right to report your outstanding amount to any of the credit bureaus. And this can damage your score. In an infographic for MSN, SwitchYard Media reported that unpaid parking tickets that go to collections can cost you up to 100 points on your credit score. Ulzheimer estimates that a collection on your account can deduct between 45 and 125 points from your score.
Renting a Car With Your Debit Card
When you pay for a car rental deposit with a debit card, some rental companies can pull your credit report. Budget car rental's FAQ explains:
"The preferred second required credential is a major credit card. Some locations will accept a debit card instead of a credit card, but then we might either check your credit report or require you to present a third form of ID as indicated in the 'Debit Card User Instructions'"
Credit Karma reports that, sometimes, these count as hard pulls.
Your credit report can be mystifying. And there are so many seemingly harmless ways to damage it. To keep your score in check, it helps to understand the basics of credit reporting, and, more importantly, know your financial habits.
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