7 Ways Americans Are Accidentally Hurting Their Credit Scores
The average American’s credit score is 713, according to Experian. That’s well within the “good” credit range.
Having good credit can help you qualify for better financing options, like auto or mortgage loans. It can even lower your insurance premiums or help you get an apartment lease without a hefty deposit.
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That said, it’s all too easy to bring your credit score down. You might even be hurting it without realizing it. Here’s how.
1. Closing Old Accounts
Ninety percent of U.S. lenders use the FICO credit scoring model to determine creditworthiness. Part of what makes up that score is the length of your credit history across all loans and credit cards.
Many people aren’t aware of this, though. As a result, they end up closing their old accounts, thinking it’s better than keeping them open. Doing this decreases your average credit history, which could bring down your score slightly.
If you don’t want to actively use older credit cards, then don’t. Just keep them active and in good standing. That way, your credit history length won’t suffer by closing them.
Some credit card issuers require that you occasionally use your card to keep it active. In that case, you can always run it once every few months for something small and then pay it off right away.
2. Applying for New Credit
New credit accounts for 10% of your FICO Score, according to MyFICO. This doesn’t just refer to new accounts being opened, though that’s a major part of it. Opening multiple new accounts in short succession can bring down your score.
But the same can be said for applying for several credit cards or loans. Each formal application counts as a hard credit inquiry. The more you have, the greater the possible impact on your score.
Note that soft inquiries don’t affect your credit score like hard inquiries do. Even hard inquiries will fall off after two years. Their impact on your score also diminishes over time.
3. Having a High Credit Utilization Ratio
How much of your total available credit you’re using matters greatly when it comes to your credit score. In fact, it accounts for 30% of your FICO Score.
Say your total limit across all credit cards is $3,000. If you’re carrying a $1,000 balance, that means you’re using about 33% of your available limit. Your best bet is to keep your utilization as low as possible. The Consumer Financial Protection Bureau (CFPB) recommended keeping it below 30%, but lower is better.
4. Missing a Payment
Missing a single payment, even by accident, might not seem like a big deal at first. But it can hurt your credit score in a big way.
As a general rule, missing a payment by a few days won’t affect your credit score. But anything beyond 30 days can. The more time that passes before you make that payment, the greater the impact to your score.
5. Cosigning Loans
When you cosign a loan, you might think you’re helping someone out and that’s the end of it. It’s not.
Cosigning means taking on responsibility for that loan, too. Even if the other person is the one who makes payments, it’s still on your credit report. You’re also equally responsible for keeping up with payments, even if the other party is the “primary” borrower. Should they fail to make a payment and you’re not aware of it or able to pay instead, both of you will be impacted.
6. Only Applying for One Type of Credit
Opening a single credit card or getting a student loan can get you on the path to building credit. But you also need to have a decent credit mix of loans and cards.
This doesn’t mean you need half a dozen accounts. Still, having different types of credit accounts can give your score a small boost.
7. Not Checking Your Credit Report
A Consumer Reports study found that 44% of people who check their credit report find at least one error. This might be as simple as a misspelled name or it might be a duplicate account. It might even be an incorrectly reported missed payment.
Not checking your report means leaving those types of errors there where they can bring your score down without you realizing it. That’s why it’s generally wise to check yours at least once or twice a year. If you find any errors, dispute them to potentially give your score a boost.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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