Most people know the conventional wisdom for keeping and maintaining your credit score at the maximum level: pay your bills on time and don’t max out your credit cards.
However, there are a surprising number of things that can hurt your credit score and can make credit repair much more difficult. Here are the top 5:
1. Waiting until the due date until you pay your credit cards.
Your credit utilization, or the ratio of your used credit divided by your total credit line, should be kept at a maximum of 30%. What most people don’t realize is that even if you pay your balances off in full each month, you could see high credit utilizations on your credit cards. Why? Because the credit card cycle often ends before the payment is due and when the credit card cycle ends, the creditors post the balance at that point. If you owe a lot on your credit cards at the end of the cycle, this high balance goes on your credit report, even if you pay it off in full on the due date. Your credit utilization is 30% of your credit score and having high ratios can cost you many points.
The moral of the story: make your payment before the credit card cycle ends, especially if you have big balances. Not sure when it ends? Call your creditor to find out –and you may have to do this every month, as payment cycles are typically 20days – not an easy period to keep track of.
2. Closing a Credit Card
Sure, it seems like the responsible thing to do is to avoid temptation and close out cards or lines of credit that you are not using, especially when you are deep in credit repair. However, credit utilization can rear its ugly head again in this scenario as in the last one we talked about. Let’s say you are carrying a total credit card balance of $2500 across 3 credit cards. Your total credit line for these cards is $10,000. You’re sitting at 25% credit utilization rate. You then decide to close one of the cards that has a $2500 credit line. This brings your credit utilization rate to33%, which is over the recommended 30% maximum, and your score takes a hit.
The other way closing an account could hurt you is by affecting the age of your accounts. While closing a credit account does not remove an account from your credit report, having active older accounts factor 15% into your credit score.
3. Applying for New Credit
Every time you apply for credit, a “hard” inquiry goes on your credit report. A hard inquiry differs from a soft inquiry in that a soft inquiry happens when you or an existing creditor requests to see your credit report and it does not affect your credit score. A hard inquiry impacts your credit score negatively, usually by 2-5 points. While just one is not going to hurt you much, applying for multiple lines of credit within a two year period (the length an inquiry stays on your credit report) will hurt your score. In addition, it will lower your total average age of accounts (as we saw above, it was 15% of your score) and decrease your score in this way as well.
4. Paying for a Rental Car with a Debit Card
Many rental car companies require you to pay for a rental car with a credit card (so the rental is covered by the credit card company insurance plan, mostly standard for credit cards). They may also be suspicious that you are paying for the account with a debit card, as your credit may be poor and if you do have damages, may be more difficult to sue if you have an accident. For those that allow you to pay with a debit card, there is a clause in their rental agreements that allows them to pull your credit if you do pay this way. This will cause a hard inquiry to be placed on your credit report and as we saw in the last point, this can hurt your credit score by 2 to 5 points. If you have mostly new credit on your report or you have a few other inquiries, your loss of points can be higher.
5. Co-signing on a Loan
If you decide to co-sign on a loan for someone because their income or credit won’t allow them to qualify for a credit card, auto loan or mortgage, you are literally putting your credit in their hands. Sure, you want to help the person you love, but your benevolence can cost you. Most people do not understand that when you co-sign for someone, you are agreeing to be just as responsible for the loan or credit card as the person for whom you are signing. If they miss a payment, it’s not only their credit that takes a hit, but yours. If the person for whom you are co-signing racks up big charges on your joint card, your credit utilization will be dinged and you could lose a lot of points.