It can be tough to figure out what exactly impacts your credit score. It seems like every person you ask has a different answer. That’s because it can be more complicated than you’d think.
But having a basic understanding of what you shouldn’t do can help you cut through questionable advice and focus on what matters. Here we’ve listed some habits you’ll want to avoid and the reasons you should avoid them.
Check out this list to see what habits impact your credit score.
1. Don’t Pay Bills Late
It happens to the best of us. Sometimes, life throws you a curveball that makes it hard to stay on top of things. You might get sick and can’t work, an urgent repair may tie up your money in unexpected ways, or a family crisis can distract you from dealing with your finances.
But sometimes life gets busy, and you forget a bill is due until your creditor reminds you. But by this point, it may be too late. Even one missed payment may have a negative impact on your credit history.
If you’ve fallen behind on your bills, look back on why you missed an important due date. Understanding the root cause of the problem can help you find the right solution.
Ask for Help
Sometimes, you’re forced to deal with unexpected expenses outside of your control. If you’re looking for some more financial guidance, you can use a free online tool like SpringFour. It may be able to connect you with resources in your community to help guide you through managing your finances.
Sometimes, you’re forced to deal with unexpected expenses outside of your control. If you’re looking for some more financial guidance, you can use a free online tool like SpringFour. It may be able to connect you with resources in your community to help guide you through managing your finances.
2. Avoid Applying for Too Many Loans
In a tight spot, it’s natural to want to turn to personal loans and online lines of credit. They can be a useful solution when you’re facing a financial emergency.
But there’s a time and place to apply for a loan. If you end up applying for multiple loans, lines of credit, and credit cards when you don’t need them, you may be doing harm to your credit.
This is because when you apply for credit, a lender may review your credit report, resulting in a hard inquiry. This inquiry may have an impact on your credit score. Multiple inquiries within a certain time period may even have a bigger impact.
A soft credit check, on the other hand, has no impact on your credit score and may be conducted for things like background checks.
3. Be Careful with your Revolving Credit
Revolving credit is the financial world’s way of talking about lines of credit and credit cards. As a refresher, with these types of loans, you’ll be given a credit limit, which is just the maximum amount of money you can borrow through that account.
In general, the amount of money you owe on a revolving credit account like a line of credit or credit card could impact your credit history. If your account is reported to one of the major credit reporting agencies, the agency will see how much of your credit you use compared to the total you have available. This little calculation produces a number that’s called your credit utilization rate.
As a general rule of thumb, you want a low utilization rate. This means you use your available credit reasonably. A high rate, on the other hand, suggests you’re frequently tapping into credit, which could mean that you have trouble managing your money.
4. Think Twice Before Closing Credit Cards and Lines of Credit
Now that you have some idea on how some of your actions could have impacted your credit score, it can be a little easier to pick up on how some of your past decisions may not have always been the healthiest financial choices. For starters, there’s no reason to beat yourself up about it. We all make mistakes at times, and there’s generally a path towards fixing them if you know where to look and you make the effort.
Once you’re ready to make an impact on your credit history, you might be tempted to close your accounts and start fresh. But it’s important to consider this option carefully.
For one thing, closing an account won’t erase a negative entry from your file. Both good and bad instances of credit hang around for much longer than your account may be open. Once a credit agency reports a missed payment, it’s in your history for the next seven years — regardless of the final status of your loan. For another thing, closing accounts affects the age of your credit. Length of history is one of the factors used when calculating your score.
Older accounts tend to show more information about your payment history than younger ones. A scoring model like FICO will be able to create a more accurate estimate of your future borrowing habits when they have more information to base their calculations on.
Closing an account may also negatively impact your credit utilization rate if the account is revolving. Remember, this rate shows how much of your credit you use. If you close a revolving credit account with a large limit, you’ll lower your overall available limit. Even if you keep your usage the same in other accounts, what you charge on them will make the utilization ratio higher, since the overall credit now available to you is lower.
That being said, keep in mind that your credit score is based on multiple factors, and you should assess your financial situation carefully before making the decision about closing a credit account.
Make Sure to Check Your Credit Report
Unfortunately, a lot of people are guilty of failing to check in with their credit reports. Many credit experts recommend taking advantage of your three free checks through AnnualCreditReport.com[1]. If you time it right, you can peek at your report every four months, giving you regular coverage throughout the year.
In general, it’s a good idea to get an idea of what’s on your credit report. The more you check in on it, the better idea you’ll have of what’s impacting your credit score, and the more you’ll understand about your spending habits. Make sure to stay plugged in to your financial life in general and do your best to keep up with good financial habits!
Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.
