Your Credit Score Is Probably Being Hurt By These Seemingly Benign Habits
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When most Americans think about their credit scores, it's pertaining to whether or not they'll be able to get a loan to buy a house at some point in the future. However, your credit score, which is determined by three credit reporting agencies (Equifax, TransUnion, and Experian), can affect far more than just your ability to get a mortgage.
Your credit score is more important than you realize
For instance, your credit score can be used by prospective landlords when you attempt to rent an apartment, condo, or house. Your payment history not only helps landlords determine if you'll pay on-time -- if you have any charge-offs, repossessions, or collections, it could tip a potential landlord off that you're not someone they should consider renting to.
A potential employer may also request access to your credit history. Screening a prospective employee's credit history can help decrease the likelihood of theft or embezzlement. The higher your credit score, the more trustworthy employees are perceived, which could help in you landing the job you're after.
Even what you pay for insurance and to utility companies can be affected by your credit score. Studies have shown that consumers with poor credit scores tend to be costlier to insure than those with high credit scores, leading some insurers to charge people with poor scores a higher monthly or semi-annual rate.
Similarly, while your credit score can't affect your ability to get water, sewage, electricity, cable, or internet from utility providers, they can certainly require you to cough up a large down payment before starting your services if you have a history of being late on your accounts.
Maintaining a good or excellent credit score can alleviate a lot of these cost burdens and make your life a whole lot more enjoyable.
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Surprising ways you may be hurting your credit score
Most Americans are well aware of the worst credit pitfalls, such as making late payments, not making payments at all, having an account sent to collections, and declaring bankruptcy. Yet there are a handful of seemingly benign habits that could be adversely affecting your credit score which you may not be aware of. Here are four such habits.
1. Closing credit accounts with good standing
One of the most common ways consumers are shooting themselves in the foot is by closing credit accounts that are in good standing. It might be tempting to close a couple of your lesser-used credit accounts if you have quite a few open, or if you simply don't use them all that often. Yet doing so can provide a credit double-whammy.
First of all, closing your credit accounts, whether in good or bad standing, lowers your cumulative available credit. If you're carrying a balance of $6,000 across all of your credit cards but have $25,000 in available credit, then your creditors and the credit reporting agencies probably aren't going to be too concerned. However, if you suddenly close a couple of your accounts and your available credit drops to, say, $12,000, a number of red flags could be raised. Even though your accounts were in good standing, you're suddenly using half of your available credit, which will likely be deemed excessive by the reporting agencies and hurt your credit score. Leaving your good-standing accounts open and using them from time to time will help your credit score over the long run.
Furthermore, FICO takes the average length of your credit history into account when calculating your credit score. It's possible that closing newly opened accounts could temporarily help you by increasing the average length your accounts have been open, but closing long-standing accounts will almost assuredly lower the average length of time your credit accounts have been open, which will lower your credit score.
Image source: Flickr user Bryan Rosengrant.
2. Not paying heed to your credit utilization rates
Another really easy mistake to make is paying little heed to your credit utilization rates. Your credit utilization (essentially how much of your available credit you're using) comprises about 30% of your FICO score. That only trails your payment history, which makes up 35% of your FICO score, in importance.
You may think that as long as you're making your revolving and installment payments on-time your credit score is increasing, but that's not always the case. The three credit reporting agencies view your credit usage as a roadmap to your credit trustworthiness. If you've maxed out your credit cards, or you've used a substantial amount of your available credit, then the reporting agencies are more likely to view you as a risk, which hurts your credit score.
According to a guest post via NerdWallet in 2013, Michael Delgado, the Director of Social Media & Community Engagement at Experian, suggested that consumers keep their credit utilization below 30%. In other words, if you have $25,000 in cumulative credit at your disposal, keep what you've charged to $7,500 or less in order to achieve the maximum benefit from the utilization component of the FICO score.
Image source: Getty Images.
3. Using only one credit card
If you think that only opening one credit account and keeping the urge to spend to a minimum will lead to an excellent credit score, your thesis is flawed.
On the one hand, sticking to just one credit account may keep you from overspending and burying yourself in debt. Being a responsible adult does count for something with the credit reporting agencies.
On the other hand, 10% of your FICO score is dependent on your mix of credit accounts. There are two types of credit accounts that the credit bureaus are honed in on: installment accounts, such as car loans, and revolving accounts, such as bank credit cards or department store cards. Possessing a good mix of both types of accounts and keeping them in good standing demonstrates to the credit reporting agencies that you're someone lenders can trust. If you have only one credit account, no matter how long you've had it, or how many on-time payments you've made, you'll be dinged by FICO's credit mix component.
Image source: Getty Images.
4. Failing to check your credit report annually
The final habit hurting Americans' credit scores is their forgetfulness when it comes to checking their credit reports.
According to a survey released last year by the American Bankers Association, 85% of Americans were aware that they get free access to a copy of their credit reports from all three credit bureaus once every year. However, based on the survey, just 60% had accessed to those free reports over the previous 12 months.
Some consumers choose not to check their credit reports because they fear that it'll hurt their credit score. Thankfully, there's no truth to this myth. Credit reporting agencies differentiate between soft inquiries, which would entail checking your credit score, and hard inquiries, which are what occur when a creditor analyzes your credit history for the purpose of opening an account. Soft inquiries don't impact your credit score, whereas hard inquiries can knock off a few points.
More important, though, is the fact that 21% of American consumers had mistakes on their credit reports based on a 2013 report from the Federal Trade Commission. If you aren't in the habit of checking your credit report, you could be missing critical errors that cost you money, or your ability to get a loan altogether.
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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.
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