1. Paying Your Bills Late
Ed Quigley meant to pay his Visa bill online. But the retired resident of Springfield, Missouri, found himself blocked from logging onto his bank account in October, due to a security issue on his computer. He used a friend’s computer to pay the bill — but two days later, he realized he hadn’t received an e-mail confirmation. At that point, Quigley was slapped with a late fee. Now he says he plans to check his credit report this fall — for the first time in four years — to see whether the late payment lowered his score. Paying debts on time accounts for 35% of the credit-scoring model, the single largest factor. But a late payment might not be reflected in the score for 60 days, says Barry Paperno, consumer operations manager at Fair Isaac Corp., which created the FICO score.
Getting Back on Track
If you miss just one payment and catch up the next month, the damage could be minor, says Credit.com’s John Ulzheimer. On the other hand, if you have good credit but miss a payment that turns into a collection or charge-off, your credit score could go down by as much as 200 points. “It’s kind of a no-brainer — everybody knows it — but it’s the one that matters most,” Paperno says. “Don’t even be a day late.” If you’re late a couple of times in paying anything — credit card bills, mortgage, even parking tickets amounting to more than $100 — then consider requesting your credit report from the three major credit bureaus to see if it’s affected your credit score, says Gail Cunningham, a representative of the National Foundation for Credit Counseling in Silver Spring, Maryland.
2. Opening Accounts, and Making Inquiries
Opening a new credit account and adding a new plastic card to your wallet can bring your credit score down a peg, Paperno says. An inquiry by anyone other than yourself — say, a potential creditor — can also erode your score. “If you open a new account but don’t open another one for at least a year or two, you can recover those points in six months to a year,” Paperno says. And excessive credit inquiries can drop a good credit score by as much as 40 points in a worst-case scenario, Ulzheimer says. (For someone with bad credit, the damage might be less.)
3. Holding the Wrong Cards
There’s nothing wrong with using department-store cards or gas cards, Paperno says — but bank-issued credit cards are better for your score, so if you don’t have one, your score might suffer. But consumers can improve their scores by being smart about how they allocate their debt payments, he adds. “If you have high credit card balances,” Paperno says, “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 improving your score.
4. Shutting Down Your Accounts
Danielle Beauparlant Moser, a career coach in Asheville, North Carolina, shut down her Air Tran Visa account in September after getting hit with what she calls fraudulent charges. “I felt like I had no other choice,” says Moser, who had had the card for a year and a half. “Why would I anticipate that closing a credit card that’s fully paid off would impact my credit score?” And yet it does. Closing any card can ding your score. If you’re frustrated by a creditor’s policies or procedures or fraudulent charges, or if you’re trying to streamline your finances by shedding a few cards, it’s wiser to let an account lie dormant than shut it down. “By closing an account, you’re actually lowering the amount of available credit you have,” Paperno says — and increasing your balance-to-limit ratio, which accounts for about 30% of your score. “You’re also decreasing your average length of credit history.” In a worst-case scenario, closing an account could cost your score more than 100 points.
5. Losing Track of Your Limits
Purchasing a big-ticket item using a buy-now-pay-later financing deal could dent your credit score. But daily decisions add up, too: Using the same credit card for both a major purchase and a daily cup of coffee could inch you closer to your limit — and lower your score. That’s why it’s essential to be aware that such actions can amount to a credit mistake, Cunningham says. Your first step toward avoiding credit-score pitfalls is to read over your credit reports, to see which actions are costing you valuable points. You may think you’re doing something financially savvy, when in fact you’re damaging the very score that’s used to help you land a loan — or even a job.
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