If you are like most consumers, you don't spend a lot of time thinking about your credit history. You may think that, as long as you're paying your bills on time, your credit history and related credit score should be shiny and clean. However, many common money habits can have a detrimental effect on your credit score without you even knowing it. Keeping these money mistakes to a minimum will help keep your score high.

Credit Consolidation
A popular financial planning tool used by banks and personal advisors is to take some or all of your old debt and roll it into a new consolidation loan. The main goals of this strategy are to refinance debt to a lower interest rate, and to lower the total monthly minimum payment. While both of these results can help your overall financial picture, getting rid of older debt can hurt your credit score. A portion of the score is determined by the length of your credit history, and open debt accounts that have a long track record of on-time payments will boost your score. Closing all of them and rolling them into a brand new loan can drop the score significantly, especially if it reduces your overall available credit. If reducing the interest rate you pay on loans and credit cards is the goal, try to negotiate a lower rate with your existing lenders before choosing consolidation.

Debt Shopping
Everyone wants to get the best rate possible on mortgages, car loans and credit cards. It is a solid financial strategy. However, financial institutions considering lending you money almost always run a credit check to ensure that you are a good risk. Multiple access requests on your credit file in a short period of time can drop your score. In the eyes of the credit score developers, this activity can indicate that you are scrambling to obtain new credit and raises a red flag on your report. Since 2009, the score has been adjusted to take this type of activity into account, but it can still have an effect. To minimize these so-called "hard hits" on your credit report, have preliminary discussions with lenders without consenting to a credit inquiry. That way, you can make a final decision with a single lender, which will run a single credit inquiry before finalizing the loan. Run a copy of your own credit score (which doesn't result in a hard hit) and provide it to lenders so that they can make an informed preliminary decision based on your credit history.

Refusing to Pay
At some point in your life, you are likely to enter into a dispute with a vendor or creditor. It may be that cool new blender you bought online that broke as soon as you got it home, or outstanding finance charges that you don't think you should pay. Unfortunately, most vendors have a big stick when it comes to coercing you to pay. They can threaten to submit the outstanding amount as a collection item on your credit report, thereby dropping your score. There are processes in place with all three major credit bureaus to handle such disputes, but the collection will stay on your report in the interim. If the bureau receives enough proof from the vendor that you do owe the amount, it will remain on your report for a full seven years. Try to work out payment disputes in a timely manner to avoid this situation. It may take repeated letters or phone calls to senior people in the vendor's organization, but it is worth the time and trouble.

Closing Credit Cards
It may seem like the best way to sensibly manage your financial situation is to close out credit cards that you're not using. A portion of your credit score, however, is determined by the amount of revolving debt you have (such as credit cards and lines of credit) versus the total amount available to you. The lower the ratio is, the more positive impact it has on your score. It shows that you have access to credit and aren't using it indiscriminately. If you close down some of that available room, the ratio goes up and your score goes down. This is especially true when you close a credit card that has a balance. The balance will remain on your report and the available room disappears. Spread out your credit card usage among all of your cards and be sure to make payments on time to keep your score high.

The Bottom Line
Your financial habits can have a significant effect on your credit score, and you should consider the impact before making large changes to your debt structure. Run a copy of your credit report at least annually so that you can analyze the effect of your money moves on your score.

Related Articles
  1. Savings

    10 Ways To Budget When You’re Broke

    Budgets are some of the best financial tools around – when planned properly and followed faithfully.
  2. Savings

    7 Ways to Trim Fat from Your Spending

    Check out these seven ways to cut the fat from your spending.
  3. Savings

    7 Millionaire Myths

    Here are seven millionaire myths and realities that reveal they don’t quite have it all.
  4. Economics

    Understanding Default Risk

    Default risk is the chance that companies or individuals will be unable to pay their debts.
  5. Budgeting

    How To Save Money When Moving

    Moving doesn't have to be as expensive as you think. Here are some great ways to save money on moving costs.
  6. Budgeting

    The Hard Way We Pay For Convenience

    Convenience is a luxury. However, any cost-conscious individual should be aware of these ridiculous ways we pay for convenience and how to avoid them.
  7. Credit & Loans

    5 Credit Cards For the Super Rich

    Understand the difference between an average credit card and an elite credit card for the wealthy. Learn about the top five credit cards for the super rich.
  8. Budgeting

    How to Cost Effectively Spend on Baby Clothes

    Don't let your baby's wardrobe derail your budget. These top tips help you to save money and spend wisely on baby clothes.
  9. Budgeting

    Key Questions to Ask Before Moving in Together

    Moving in together is a big step. Here are some key financial questions to ask your partner before you make the move.
  10. Personal Finance

    College Students are Failing Financial Literacy

    Financial trends among college students are a cause for concern, prompting a renewed emphasis on financial literacy.
  1. What is the best way to start to rebuild your credit after a bankruptcy?

    Bankruptcies can be devastating to your credit score. Even worse, a bankruptcy will be listed on your credit report for between ... Read Full Answer >>
  2. Does every inquiry affect a credit score?

    Not every inquiry affects a credit score. However, there are instances when certain types of inquiries do affect the score, ... Read Full Answer >>
  3. Will my credit score suffer from debt consolidation or refinancing?

    You have several options for reducing your debt burden. You can enroll in a professional debt management plan, or consider ... Read Full Answer >>
  4. Can I file for bankruptcy more than once?

    Filing bankruptcy is never a simple decision, but sometimes it is the best thing you can do in your current financial situation. ... Read Full Answer >>
  5. Why would someone change their Social Security number?

    In general, the Social Security Administration, or SSA, does not encourage citizens to change their Social Security numbers, ... Read Full Answer >>
  6. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!