These days it is more important than ever to maintain a good credit score. Whether you're planning to buy a home, finance a new vehicle or even sign up for a new mobile calling plan, your credit score will follow you almost everywhere you go. While most of us know the basics of how our credit scores and reports work, and how to build, improve or repair our scores, 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
Closing an Older Credit Card
It is not uncommon for individuals to have credit cards that may be 10, 15 or even 20 years old. These cards were probably one of, if not the first credit cards you ever signed up for. With credit cards companies constantly looking for new incentives to coerce us to sign up for more cards, these older cards most likely don't offer much more than the bare bones, when it comes to rewards or options. Since most people would rather earn rewards points or cash back with their credit purchases, older, less practical cards, probably end up at the back of your wallet or the bottom of your purse collecting dust.
For those looking to rid themselves of some excess plastic, these old cards seem like logical candidates for cancellation. Well, not so fast. 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. Take a look at the relatively newer cards that you may not have much use for and think about canceling those, before getting rid of "old dependable."
Shopping Around for Better Rates
If you're planning on buying a home, you naturally want the best rate you can get, however, you don't want your credit to get dinged every time you sit down with a loans officer at a bank. This is a common misconception among the general public, one that most lenders don't exactly go out of their way to correct. 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). It's probably best, however, to limit your shopping to around two or three weeks, to limit potential inaccuracies.
This new found information does not change the old adage about serial credit seeking. Individuals who continually apply for revolving credit, such as credit cards, do not qualify for the single check exception, since theoretically the individual could end up being approved for multiple credit cards, which they may not be able to support. Folks shopping for a lower mortgage rate, however, will, in most cases, not be given multiple mortgages. So go ahead and get yourself the best rate you can on a mortgage or car loan, but don't jump from lender to lender, looking for a high interest credit card.
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, for the next few months, on any balances you transfer over from your other credit cards. It's easy to get carried away, thinking the days of struggling to make payments on five different credit cards are over. 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?
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 or line of credit, 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% mark and your credit score should be just fine. (For an additional reading on interest rates, read Understanding Credit Card Interest.)
Gyms, 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 thousands of dollars of unpaid parking tickets, or months of unpaid gym dues from a forgotten contract, showing up on credit reports and subsequently lowering credit scores, have become more and more common. 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.