6 Bad Money Decisions That Can Hurt Your Credit Score
Paying credit cards and other bills late, or not paying them at all, are some of the worst ways to lower a credit score.
And since a low credit score is a sign of higher risk to lenders, it can mean paying more for credit than you have to.
Unfortunately, late payments aren’t the only things that cause credit scores to drop. Here are five others that can drag it down that you may not think about before doing them:
1. Closing an Old Credit Account
Having too many credit cards in your purse or wallet can be a pain in the neck when you’re trying to find the right one. And what if you lose one but don’t realize it for months until a fraudulent charge shows up on your bill?
Closing an old credit card that you no longer use or rarely use can seem like a smart money move.
But it isn’t if you’ve had the account for years and have used it wisely by paying off balances soon and not having any late payments.
Length of credit history affects 15% of an overall credit score, which is a fairly big amount considering you’re just keeping old accounts open with a few cards.
Close one of those old accounts and your score will likely drop. For about 10 more years a closed account will affect the calculation of the average age of all of your accounts. In other words, you’ll have a shorter credit history.
A score could also drop if the closed account raises your credit-utilization ratio. That’s the amount of credit you’re using, and having less credit available will likely mean you’re using more of the credit left that you do have.
2. Closing Multiple Accounts at Once
Closing one old account can hurt your account history, and closing a number of credit cards that you’ve paid off can hurt a lot more.
Why? It comes back to credit utilization, which is part of the “amounts owed” part of a credit score. How much you owe makes up 30% of a FICO credit score.
Using more of the credit available to you is seen as a risk by creditors. A credit utilization score can skyrocket if multiple credit accounts are closed at the same time, especially if the closed cards have high spending limits.
You could end up with less available credit on the remaining cards you keep, but use more of that limit by charging the same amount as you did before.
A better solution would be to keep all of the accounts open and to leave the balances of the unused cards at zero.
The one time when you may want to close a card you don’t use, however, is if it has an annual fee that isn’t worthwhile through a benefit it offers. A hotel credit card may be worth the annual fee if you get a free night’s stay at a hotel by only using the card once in a year.
3. Opening New Credit Cards at the Same Time
On the other side of not having enough credit is having too much.
Opening multiple lines of new credit at once results in multiple inquiries from lenders for your credit reports. You may not be approved for the new credit, but just applying for them can be enough to lower a credit score.
If you have a short credit history or don’t have many credit accounts, having too many lender inquiries at the same time can lower a credit score.
The credit reporting agency FICO says that having six or more credit inquiries on a credit report are eight times more likely to declare bankruptcy than those with none.
The risk of using all of those new cards at once and racking up new debt can also scare potential lenders. If you need a bunch of credit cards at once and are reaching each card’s spending limit, then you’re increasing your credit-utilization ratio by using more of the credit available to you.
To fix that, don’t charge a lot on the cards, pay them off quickly and keep the balances low.
Or better yet, don’t respond to every credit card offer that comes your way and don’t sign up for store credit cards that offer immediate shopping discounts.
4. Marrying Into Poor Credit
Marrying someone with a lousy credit score won’t hurt your credit score, and vice-versa. That’s the good news.
The downside of marrying someone with a low credit score is that starting your lives together by sharing your finances can be a little trickier.
Opening credit cards or getting a loan together, or just putting both of your names on a checking account, means you’re both responsible for the debt. Both of your credit scores will be factored into if you can open an account together (even a checking account) or if you qualify for a loan as a couple.
Making payments for a joint account on time and not taking on too much debt should allow your credit score to improve.
The potential roadblock is that qualifying for credit may be harder for awhile if one person has a low score and the other doesn’t.
5. Applying for a Mortgage With Multiple Lenders
Shopping for a mortgage is smart, but not if you’re shopping for a few months.
Too many lenders making inquiries for your credit report outside of 45 days of each other can lower your credit score.
Most credit scores, however, allow 30 days to shop for mortgages and other types of loans without being penalized by too many credit inquiries. All such requests within 45 days of each other are counted as a single inquiry.
So if you’re going to shop for a home or auto loan, do it within about six weeks.
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