Whether you're planning to buy or rent a home, finance a new vehicle, or even sign up for a new mobile calling plan, it is now more important than ever to maintain a good credit score. While most of us know the basics of how our credit scores and reports work, you may be surprised at some of the things that can have a negative effect on your credit score.
TUTORIAL: How To Manage Credit And Debt
1. Closing an Older Credit Card
Do you have credit cards that are 10, 15, even 20 years old that you want to cancel because they don’t give the rewards a new card can? Do you want to get rid of that extra card you applied for years ago just because of the free t-shirt or bonus miles? You might want to think again about canceling them (or even applying for an extra card).
Your older cards have the longest history of credit and payments and, therefore, may have a larger than expected influence on your overall credit score. By potentially removing years of positive credit history, by canceling an old card, your credit score may actually end up being negatively affected. Additionally, when you close a card, you reduce your overall available credit. Unless you scale back your spending or pay off other cards before closing, this will negatively affect your credit utilization rate, which is one of the most significant factors used to calculate your credit score. It could also reduce your average age of accounts, which has the potential to negatively affect your credit score.
The best advice is to only apply for credits cards that you need, while making sure you have enough credit outstanding to have sufficient credit history. If you really need to cancel a card, take a look at the relatively newer cards that you may not have much use for before getting rid of "old dependable."
2. Being a “Serial Credit Seeker”
Individuals who continually apply for revolving credit, such as credit cards and personal loans, do not qualify for the single check exception in the application process, thus increasing their chances of getting approved. This is due to the fact that, theoretically, the individual could end up being approved for multiple credit cards, which they may not be able to support.
Many people think the same holds true when shopping around for the best mortgage rate, but it might not actually be the case. The truth is, for instances where an applicant is "rate shopping," multiple credit checks will actually be treated by the credit bureau as a single check, so long as the checks have all been done in a reasonable period (45 days for the FICO score). So go ahead and get yourself the best rate you can on a mortgage or even a car loan, but try to limit your shopping to around two or three weeks in order to limit potential inaccuracies.
3. Transferring Debts to a Lower Rate Card
You're going through your mail and there's an envelope saying you've been pre-approved for a new credit card, with a high limit and low introductory rate. Even better, the card company is offering next to no interest on any balances you transfer over from your other credit cards (for an introductory period). This sounds like a good deal right? You could transfer all your credit card debt to one card and save on interest for the next few months, while you pay down your debts. But should you actually do this?
It's not as simple as you may have thought. If your balance on your new card ends up being close to 80%, 90% or even 100% of the card's limit, your newly consolidated debt can actually lower your credit score. Debt-to-limit ratios exceeding 50% on a credit card set off alarms at the bureau, possibly leading to decreasing credit scores. In fact, having five cards with balance-to-limit ratios around 20% is usually better than a single card that's nearly maxed out. To avoid seeing your score drop, try and keep you balance below the 30% of your card’s available credit line. (For an additional reading on interest rates, read Understanding Credit Card Interest.)
4. Forgetting About Gym Fees, Texting and Library Dues
Credit cards, mortgages and, student loans are things we expect to find on our credit reports. But what about gym dues, cell phone bills and library late fees? Today more and more businesses and municipalities are reporting unpaid debts to the credit bureau, be it directly or via a collections agency. Instances of individuals having unpaid parking tickets, or months of unpaid gym dues from a forgotten contract, showing up on credit reports are becoming more common, and they lower your credit score. So, don't think that you can get away with not paying for that copy of "Atlas Shrugged" you borrowed from your local library and never ended up returning. (Read more about how paying bills late affect your credit with How Credit Card Delinquency Works.)
The Bottom Line
These are just a few unexpected items that can end up affecting your credit score. For the majority of us however, there's a much simpler formula to credit score success: don't buy what you can't afford and if you end up over extending yourself, paying down your debts should be priority number one.